High-frequency indicators suggest a significant – and sustained – pick-up in Indian economic activity after a first-half trough this fiscal, central bank economists said, pointing to the ability of budget-anchored local consumption uptick to overcome adverse effects of both protectionist tariffs and a global dash for safe-haven assets since Donald Trump’s election.
“Strong macroeconomic fundamentals, along with improvements in various measures of external sector vulnerability, have helped India tide over the ongoing wave of global uncertainty,” said the report in the latest Monthly Bulletin of the Reserve Bank of India (RBI).
To be sure, the RBI says the views do not necessarily represent those of the central bank.
The authors also said that there is a rebound in consumption demand, likely to be undergirded by the unprecedented tax cuts announced in the federal budget.
Indicators such as vehicle sales, air traffic, steel consumption and GST e-way bills point toward a sequential pickup in momentum of economic activity during the second half of FY25, said the economists.
Industrial activity has improved over the previous quarter, while rural demand sustained, buoyed by increasing farm incomes.
Economic expansion slowed to a seven-quarter low in the three months to September, although festive-season demand for consumption items was robust.
Easing Inflation
The country’s headline inflation, measured by Consumer Price Index, eased to a five-month low of 4.3% in January from 5.22% in December, helped by deceleration in food inflation to 5.7% from 7.7%.
There is expectation that rural demand would grow and urban demand would recover, tracking decline in inflation as well as a boost to disposable incomes from the sizable income tax relief announced in the Union Budget.
While showing confidence over the Indian economy, the RBI economists expressed concerns over the impact of the likely reciprocal tariffs by the US.
“The US trade policy uncertainty has spiked to levels last seen during the 2019 episode of US-China trade war and restrictive trade policies and fragmentation could lead to a long term shift in global trade patterns rather than a short term disruption, and upward pressures on consumer and business costs,” the central bank researchers observed.
A World Economic Forum report in January stated that Donald Trump’s threatened tariffs are projected to damage the economies of the US, Canada, Mexico and China.
“These policies could stoke inflation, engender tighter financial conditions, and heighten market turbulence,” the RBI report said. “In this challenging and increasingly uncertain global environment, the Indian economy is poised to sustain its position as the fastest growing major economy during 2025-26 as per the estimates of major multilateral agencies.”
Price Risks
The uncertainty along with volatility in energy prices and adverse weather events, however, pose upside risks to India’s inflation trajectory. Meanwhile, robust kharif production and better rabi sowing, coupled with higher reservoir levels and seasonal winter correction in vegetable prices, augur well for food inflation going forward.
The global growth and trade outlook, however, faces downside risks from the evolving US tariffs, the timing and magnitude of which remain highly uncertain.
The financial markets remain on edge on the slowing pace of disinflation and the potential impact of tariffs which potentially require central banks to recalibrate policies, the RBI report noted.
“A strong dollar, driven by US economic resilience and trade policy pivots, could exacerbate capital outflows from emerging economies, push risk premiums higher, and intensify external vulnerabilities.”
