India’s economy holds steady despite global turbulence, says RBI

New Delhi: Despite rising global risks from trade tensions and geopolitical conflicts, India’s economy remains resilient, with key sectors maintaining momentum, the Reserve Bank of India (RBI) said in its latest State of the Economy report released Wednesday.

The central bank, however, warned that prolonged trade policy uncertainty and increasing protectionism could leave a lasting impact on the global economy.

“High-frequency indicators for May 2025 point towards resilient economic activity in India across the industrial and services sectors,” the RBI said, highlighting the economy’s relative stability amid external headwinds.

The report, published as part of the RBI’s monthly bulletin, flagged deepening geopolitical tensions as a key downside risk to an already fragile global growth.

The RBI warned that a further deterioration in the global environment could undermine trade flows and financial stability.

"The intensifying geopolitical tensions too may further debilitate the already weakened growth impulses," it added.

It said global trade policy, especially the expected expiry of a temporary US reciprocal tariff truce in July will be a key factor to watch.

On 2 April, US President Donald Trump announced plans to enforce reciprocal tariffs on countries that impose higher duties on US goods, framing it as a measure to restore trade fairness.

The announcement triggered global concern over a return to aggressive protectionism, unsettling markets and trade partners. For India, it signalled potential pressure to lower import tariffs or face retaliatory duties, and raised fears of stricter US scrutiny on its exports. 

However, on 9 April, Trump issued a 90-day pause on these tariffs.

India and the US have been locked in intense negotiations to secure a trade deal before the pause ends.

RBI added that geopolitical developments will also play a major role in shaping medium-term growth for India and the world. The central bank cited ongoing conflict between Israel and Iran, along with the resulting unrest in West Asia, as adding to the global uncertainty.

"Since 13 June, however, uncertainty once again loomed large over the macroeconomic landscape in the wake of renewed geopolitical turbulence in the Middle East," it added.

Easing repo rates

The RBI report said that the decision of the RBI's Monetary Policy Committee (MPC) to reduce the policy repo rate by 50 basis points to 5.5% earlier in June, will stimulate private consumption and investment.

"A likely undershoot of inflation to below the target rate, at the margin, during the current financial year and evidence of further anchoring of inflation expectations provided the MPC with the policy space to decisively focus on growth by frontloading the rate cut," it added.

To be sure, changes in the central bank’s policy rate influence inflation by altering borrowing costs. Lower rates spur consumption and investment, potentially pushing prices up, while higher rates dampen demand and ease inflationary pressures.

By managing interest rates, the central bank calibrates economic activity to keep inflation aligned with its target.

Interestingly, retail inflation cooled to its lowest level in over six years in May, helped by a sharp moderation in food prices, according to provisional government data released on 12 June.

Consumer Price Index (CPI)-based inflation eased to 2.82% year-on-year, down from 3.16% in April and 4.8% in May last year, data from the Ministry of Statistics and Programme Implementation (MoSPI) showed.

This marks the fourth consecutive month of sub-4% inflation, the longest such streak in at least five years.

The RBI aims to maintain CPI inflation at a target of 4%, within a flexible tolerance band of ±2%, while simultaneously fostering economic growth.

Sustained economic momentum

The RBI said that overall economic activity remained robust in May 2025, with key high-frequency indicators like e-way bills, goods and services tax (GST) revenue, toll collections, and digital payments showing strong growth.

On agriculture, it said that high-frequency indicators for the ongoing kharif agricultural season point to largely favourable conditions for good sowing, though uncertainties remain on the distribution of monsoon.

"High-frequency food price data for June so far (up to 20 June 2025) shows a moderation in prices of pulses while prices of cereals have risen marginally," it said.

Meanwhile, gross inward foreign direct investment (FDI) amounted to $8.8 billion in April 2025, higher than $5.9 billion in March 2025 and $7.2 billion in April 2024, the RBI said, adding that manufacturing and business services accounted for nearly half of the gross FDI inflows in May.