Continued uncertainty on the tariffs, slow credit growth and private investment appetite may limit India’s economic momentum even as it gives the look and feel of “steady as she goes” as far as FY26 is concerned.
“Further, 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,” Finance Ministry said in its monthly review for June 2025.
The Indian economy in mid-2025 presents a picture of "cautious optimism", said the ministry. "Despite global headwinds marked by trade tensions, geopolitical volatility, and external uncertainties, India’s macroeconomic fundamentals have remained resilient," it said, adding that India appears poised to continue as one of the fastest-growing major economies.
In Q1 FY26, the country’s economic activity was underpinned by strong domestic demand, robust services growth, and encouraging signs from manufacturing and agriculture. "Agricultural activity received a significant lift from a favourable southwest monsoon, which arrived early and has so far delivered above-normal rainfall," said the ministry.
"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," it said.
According to NABARD's rural sentiment survey, over 74.7 percent of rural households expect income growth in the coming year, the highest since the survey’s inception.
Room for sustaining rate-cut cycle
Core inflation, meanwhile, remains subdued, and overall inflation is comfortably below the RBI’s 4 percent target, affording room for the easing cycle to be sustained, the ministry said.
The Reserve Bank of India has projected headline inflation at 3.4 percent 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 percent," said the ministry.
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.
On the fiscal front, both the Union and state governments have maintained momentum in capital expenditure while adhering to consolidation goals. The revenue sources remain buoyant despite the tax cuts, continuing on the double-digit growth path, the ministry noted.
Despite monetary easing and a strong bank balance sheet, credit growth has slowed, reflecting cautious borrower sentiment and possibly risk-averse lender behaviour, it highlighted. "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."
Financial markets resilient
India's financial markets have demonstrated notable resilience, primarily driven by strong domestic investor participation. "This resilience is further underpinned by the robust health of the banking sector, as banks have strengthened their capital and liquidity buffers while improving their asset quality," said the ministry.
Reflecting these improvements, the GNPA ratio and the NNPA ratio of the scheduled commercial banks are at a multi-decade low of 2.3 percent and 0.5 percent, respectively, complemented with strong earnings, it added.
On the jobs front, the ministry said that India’s labour market has remained steady, with white-collar hiring witnessing a strong rebound with a double-digit YoY hiring rise.
The employment sub-indices of the PMI indicate robust employment growth, remaining in the expansionary zone for the 16th consecutive month. Formal job creation is also on the rise, with the Employee Provident Fund Organisation recording an all-time high addition of net members during May 2025.
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