MUMBAI: The monsoon season has been progressing well. We are also approaching the festival season, which typically brings greater enthusiasm and buoyancy in economic activity. This favourable domestic setting, together with supportive policies of the Government and the Reserve Bank, augurs well for the Indian economy in the near term, as geopolitical uncertainties have somewhat abated, even though global trade challenges continue to linger. Over the medium-term also, the Indian economy holds bright prospects in the changing world order drawing on its inherent strength, robust fundamentals, and comfortable buffers. At the Reserve Bank, leveraging on the room provided by a significant moderation in inflation, we have taken decisive and forward-looking measures to support growth.
The Monetary Policy Committee (MPC) noted that, while headline inflation is much lower than projected earlier, it is mainly due to volatile food prices, especially of vegetables. Core inflation, on the other hand, has remained steady around the 4 per cent mark, as anticipated. Inflation is projected to go up from the last quarter of this financial year. Growth is robust and as per earlier projections though below our aspirations. The uncertainties of tariffs are still evolving. Monetary policy transmission is continuing. The impact of the 100 bps rate cut since February 2025 on the economy is still unfolding.
On balance, therefore, the current macroeconomic conditions, outlook and uncertainties call for continuation of the policy repo rate of 5.5 per cent. The MPC resolved to maintain a close vigil on the incoming data and the evolving domestic growth-inflation dynamics to chart out the appropriate monetary policy path.
Domestic growth is holding up and is broadly evolving along the lines of our assessment even though some high-frequency indicators showed mixed signals in May-June. Rural consumption remains resilient while urban consumption revival, especially discretionary spending, is tepid. On the supply side, steady southwest monsoon is supporting kharif sowing, replenishing reservoir levels and boosting agriculture activity. Moreover, services activity remains steady, though some high-frequency indicators recorded a modest expansion. Services PMI increased to an 11-month high of 60.5 in July 2025. Construction activity continues to exhibit resilience. However, growth in the industrial sector remained subdued and uneven across segments, pulled down by electricity and mining.
CPI headline inflation declined for the eighth consecutive month to a 77-month low of 2.1 per cent in June.14 This was driven primarily by a sharp decline in food inflation, led by improved agricultural activity and various supply side measures. Food inflation recorded its first negative print since February 2019 at (-) 0.2 per cent in June. Double-digit deflation in vegetables and pulses drove this contraction. High-frequency price indicators signal a continuation of the lower price momentum in food prices to July as well. Fuel group inflation moderated over two successive months to record 2.6 per cent in June. Core inflation, which remained within a narrow range of 4.1-4.2 per cent during February-May, increased to 4.4 per cent in June, partly driven by a continued increase in gold prices.
CPI inflation, however, is likely to edge up above 4 per cent in Q4:2025-26 and beyond, as unfavourable base effects, and demand side factors from policy actions come into play. Barring any major negative shock to input prices, core inflation is likely to remain moderately above 4 per cent during the year. Weather-related shocks pose risks to inflation outlook.
India’s current account deficit (CAD) moderated to 0.6 per cent of GDP in 2024-25 from 0.7 per cent of GDP in 2023-24 due to robust services exports and strong remittances receipts despite higher merchandise trade deficit. Merchandise trade deficit further widened in Q1 of 2025-26. India’s share in world services exports has risen markedly from about 2 per cent in 2005 to 4.3 per cent in 2024, driven by strong software and business services exports. Robust services exports coupled with strong remittance receipts are expected to keep CAD within the sustainable level during the current financial year.
On the external financing side, gross foreign direct investment (FDI) to India remained strong during April-May 2025-26. However, net FDI moderated during this period due to higher outward FDI. Foreign portfolio investment (FPI) inflows to EMEs have remained strong in May and June 2025.21 However, net FPI to India recorded outflows of US$ 0.8 billion in 2025-26 so far (April-July 31) due to outflows in the debt segment. Inflows under non-resident deposits too remained positive, albeit witnessing some moderation. As on August 1, 2025, India’s foreign exchange reserves stood at US$ 688.9 billion, sufficient to cover more than 11 months of merchandise imports.
Going ahead, the Reserve Bank will continue to be nimble and flexible in its liquidity management. We will endeavour to maintain sufficient liquidity in the banking system so that the productive requirements of the economy are met and transmission to money markets and credit markets remains smooth.
Bank credit grew at 12.1 per cent during 2024-25. While it is slower than the growth rate of 16.3 per cent in 2023-24, it is higher than the average growth rate of 10.3 per cent recorded in the ten-year period preceding 2024-25. Moreover, while the flow of non-food bank credit during the financial year 2024-25 reduced by about Rs 3.4 lakh crore from Rs 21.4 lakh crore to almost Rs 18 lakh crore, the flow from non-bank sources more than made up for this decrease. Thus, even though the growth rate of bank credit slowed last year, the overall flow of financial resources to the commercial sector increased from Rs 33.9 lakh crore in 2023-24 to Rs 34.8 lakh crore in 2024-25. This trend continues during the current financial year as well. As transmission to money markets has been faster, large corporates increasingly relied on market-based instruments such as commercial paper and corporate bonds to source funds, reducing their reliance on bank credit. Also, as the profitability of large corporates has increased, their internal resources have become an important source for business expansion.
Source: The Pioneer
