Amid geopolitical tensions and tariff policy uncertainties, the Indian economy has remained resilient, aided by strong macroeconomic fundamentals, according to an article in the Reserve Bank of India’s July monthly bulletin.
“Domestic economic activity held up in June, with high-frequency indicators pointing to improving prospects of the kharif agricultural season and continuation of strong momentum in the services sector,” according to the ‘State of the Economy’ article in RBI’s July bulletin.
The article has been prepared by central bank officials. The RBI said views published in the article are of the authors and not of the institution.
It said that the growth in rural demand remained resilient and was accompanied by a recovery in urban economic activity. The all-India unemployment rate remained unchanged from the previous month at 5.6 per cent with rural areas faring better as compared to their urban counterparts.
During April-May 2025, total expenditure grew by 19.7 per cent on a year-on-year (y-o-y) basis, accounting for 14.7 per cent of the Budget Estimates for FY26. Capital expenditure recorded robust growth during the first two months of the current fiscal and was at 19.7 per cent of the budgeted capital expenditure vis-à-vis 12.9 per cent during the same period a year ago, indicative of front-loading of capital spending by the Central government.
India’s merchandise trade deficit narrowed in June 2025, due to contraction in both oil and non-oil trade deficit.
De-escalating geo-political tensions in the Middle East, optimism on trade deals and the easing of norms for infrastructure financing by the Reserve Bank buoyed up domestic financial market sentiments in the second half of June, the article said.
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In the first half of July, however, domestic markets traded with a negative bias as investor sentiment remained cautious amidst ongoing uncertainty over the potential India-US trade agreement and mixed corporate earnings results by companies in the first quarter of FY25.
The article said that easing inflation, front-loading of government expenditure, targeted fiscal measures and congenial financial conditions for faster transmission of rate reductions should support aggregate demand in the economy, going forward.
Headline inflation, as measured by y-o-y changes in the all-India consumer price index (CPI), declined to 2.1 per cent in June 2025 — the lowest since January 2019 — from 2.8 per cent in May. The retail inflation remained below the 4 per cent target for the fifth consecutive month in June.
On the trade front, the article stated that as intense negotiations are underway for closing trade deals before the new import tariff rates kick in from August 1, 2025, the focus is back on US trade policies and their spillover effects globally.
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Financial markets, however, seem to have taken trade policy uncertainties in their stride, possibly reflecting optimism on reaching trade deals that are less disruptive to the global economy. Even so, underpricing of macroeconomic risk by financial markets remains a concern.
What the RBI article said about tariff risks
According to the article, the average trade tariff rates are set to touch levels unseen since the 1930s. Moreover, the risk of imposition of new high tariffs looms large for additional sectors.
The evolving pattern of global trade flows and supply chains are far from settled, the article highlighted, adding that these uncertainties pose considerable headwinds to global economic prospects.
“Amidst rising trade uncertainties and geo economic fragmentation, building more resilient trade partnerships presents a strategic opportunity for India to deepen its integration with global value chains,” it said.
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In addition, measures to accelerate domestic investment in infrastructure and structural reforms aimed at improving competitiveness and productivity would build resilience while supporting the growth momentum.
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