Six months into the current calendar year, the Ministry of Finance is of the view that the Indian economy presents a picture of “cautious optimism”, with the country’s macroeconomic fundamentals remaining resilient despite global headwinds marked by trade tensions, geopolitical volatility, and external uncertainties. However, the Ministry in its latest month economic review for June released Monday, flagged the slow credit growth despite monetary easing by the Reserve Bank of India (RBI) and private investment appetite that may restrict acceleration in economic momentum.
Global slowdown and uncertainty about the US tariffs may also weigh on India’s trade performance and dampen the country’s share of exports. In the medium term, given the ongoing momentous shifts in global supply chains in the areas of semiconductor chips, rare earths and magnets, India has its task cut out, the Ministry said.
“Despite monetary easing and a strong bank balance sheet, credit growth has slowed, reflecting cautious borrower sentiment and possibly risk-averse lender behaviour. A growing preference for bond markets, particularly commercial papers among corporates due to lower borrowing costs, may also explain the shift. Piggybacking on initiatives like the Employment Linked Incentive (ELI) scheme, it is time for corporates to set the ball in motion,” it said.
The RBI had begun pumping money into the banking system in December 2024, while the Monetary Policy Committee (MPC) started cutting interest rates in February. However, the MPC’s 100 basis points of rate cuts and the lakhs of crores of money provided by the RBI to the banking system has had little impact on demand for loans, with credit growth having almost halved from the middle of 2024. According to data released on June 30 by the RBI, non-food credit extended by Indian banks rose 9.8 per cent year-on-year as at the end of May, slower than 11.2 per cent growth in April and 16.2 per cent a year ago, after excluding for the impact of the merger of HDFC Bank with Housing Development Finance Corporation in July 2023.
The Finance Ministry also said that despite the broadly positive outlook, downside risks remain from global slowdown as well as uncertainty on the US tariffs. “While geopolitical tensions have not elevated further, the global slowdown, particularly in the US (which shrank by 0.5 per cent in Q1 2025), could dampen further demand for Indian exports. Continued uncertainty on the US tariff front may weigh on India’s trade performance in the coming quarters. Slow credit growth and private investment appetite may restrict acceleration in economic momentum,” it said.
It pointed out that the economic activity in real terms, that is, adjusted for inflation, may present a healthier picture than it is. “Given the deflationary trend in the wholesale price index, one has to observe economic momentum in nominal quantities. Measured in constant prices, economic activity may appear healthier than it is. All that said, the economy has the look and feel of “steady as she goes” as far as FY26 is concerned,” it said.
Inflation, oil prices, agri outlook
Overall, the Finance Ministry said the first quarter of FY26 presents a picture of resilient domestic supply and demand fundamentals citing the sharp slide in inflation, favourable progress of southwest monsoon, firm trade performance amid shifting global trade patterns. “With inflation remaining within the target range and monsoon progress on track, the domestic economy enters the second quarter of FY26 on a relatively firm footing,” it said.
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Wholesale price inflation (WPI) in June had slipped into deflationary zone — a level below zero for the first time in 20 months — to (-) 0.13 per cent as prices of food articles and fuel registered deflation, along with lower manufactured product costs. India’s headline retail inflation rate had slowed more than expected to a 77-month low of 2.1 per cent in June from 2.82 per cent in May as food prices fell 1.06 per cent from a year ago, aided by a favourable base effect.
Given the comfortable trajectory of inflation, there is room for RBI’s monetary easing cycle to continue, the Ministry said. “Core inflation remains subdued, and overall inflation is comfortably below the RBI’s 4 per cent target, affording room for the easing cycle to be sustained. The RBI has projected headline inflation at 3.4 per cent for the Q2 of FY26, while in Q1, actual inflation came below the Q1 target of the RBI. It appears likely that the full fiscal year inflation rate would undershoot the central bank’s expectation of 3.7 per cent,” it said.
Also, global crude oil prices are expected to remain subdued, following a larger-than-anticipated production hike by OPEC and its allies, who raised output by 548,000 barrels per day in August, on top of the production increases announced for the previous months, it said. On the fiscal front, both the Union and State governments have maintained momentum in capital expenditure while adhering to consolidation goals, it said, adding that the revenue sources remain buoyant despite the tax cuts, continuing on the double-digit growth path.
The rural outlook also looks strong as agricultural activity received a significant lift from a favourable southwest monsoon, which arrived early and has so far delivered above-normal rainfall, the Ministry said. “Fertiliser availability and reservoir levels are more than adequate, suggesting a strong outlook for the kharif sowing and harvest and consequent rural income and demand. The agriculture sector’s steady performance continues to serve as a stabilising pillar for the broader economy and bolsters the rural outlook. According to NABARD’s rural sentiment survey, over 74.7 per cent of rural households expect income growth in the coming year, the highest since the survey’s inception,” it said.
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