The domestic economy has entered the second quarter on a relatively firm footing, according to a report by the Ministry of Economic Affairs.
In the June review of the economy, the Ministry said that the first quarter of FY26 “presents a picture of resilient domestic supply and demand fundamentals”.
The favourable progress in the south-west monsoon, according to the review, has bolstered agricultural activity, leading to higher kharif sowing compared to the previous year. “Adequate fertiliser availability and comfortable reservoir levels augur well for a healthy harvest outlook, providing fresh impetus to rural incomes and consumption,” the review said.
Inflationary pressures continue to recede in Q1 of FY26, with CPI (consumer price index) inflation falling to a 77-month low of 2.1 per cent in June 2025. “This sharp moderation was driven by a significant decline in food inflation, particularly in the prices of vegetables and pulses. Wholesale price inflation also moved into the deflationary zone at -0.1 per cent, providing further relief on the cost front,” the review said.
According to the review, the country’s trade performance remains resilient in Q1 of FY26. Total exports (goods and services) grew by 5.9 per cent (YoY). Core merchandise exports rose by 7.2 per cent (YoY). Foreign exchange reserves remained at a comfortable level, providing an import cover of more than 11 months. “Despite external headwinds, ranging from brief conflict in the Middle-East to fluctuations in oil price, the exchange rate movements were well contained, with the rupee exhibiting low volatility through June,” the review said.
The 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,” the review said.
Downside risks remain
“Despite monetary easing and a strong bank balance sheet, credit growth, however, 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,” the review said.
Notwithstanding the broadly positive outlook, downside risks remain. While geopolitical tensions had not elevated further, the global slowdown, particularly in the USA (which shrank by 0.5 per cent in Q1 2025), could dampen further demand for Indian exports, the review said. “Continued uncertainty on the USA tariff front may weigh on India’s trade performance in the coming quarters,” it added.
“Slow credit growth and private investment appetite may restrict acceleration in economic momentum. 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. All that said, the economy has the look and feel of “steady as she goes” as far as FY26 is concerned,” the review said. 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,” it said.
