External uncertainties remained high, first led by evolving US’s tariff policies, and then due to geopolitical flare-ups. Israel Iran war escalated in June, as US struck the Iran’s nuclear facilities. However, the geopolitical uncertainties ebbed as fast as they had flared up with the ceasefire. This was reflected in Brent crude prices, which had surged up to ~USD79/bbl, before cooling off to under USD 70/bbl as the ceasefire was announced. Amidst the global turmoil, Indian economy remains relatively more resilient, supported by a domestic focused economy, improving government spending, low inflation and higher banking system liquidity.
US retail sales weakened sharply to 3.3% in May, down from 5% in April and lower than the last 6-month average of 4.4%. The weak retail sales was also a lagged reflection of soft data like consumer confidence which had declined to 52.2 in April & May, against an average of 64.2 in the quarter January – March 2025. However, US consumer sentiment revived to 60.7 in June, potentially indicating tariff related uncertainties could have a lower impact than initially feared. July will be a critical month as the deadline ends for reaching a consensus on tariff policies. Labour market continued to be strong, with unemployment declining to 4.1% (vs 4.2% in the previous month). Non farm payrolls came in at 147k, against expectations of 106k. Manufacturing Purchasing Managers' Index (PMI) improved from the previous month to 52.9, remaining in expansionary zone for 6 consecutive months. Services PMI was recorded at 52.9 and has remained in expansionary zone for more than a year now. US inflation came in line with expectations at 2.4% and core inflation at 2.8% (marginally lower than expectations of 2.9%), though it still remains elevated. Tariff related uncertainty may impact the US’s inflation trajectory.
India’s CPI for May softened to a 75 month low at 2.8%, thereby remaining below the 4% mark for the 4th consecutive month. The decline in inflation was largely led by food inflation moderating to 1.50% YoY vs 2.14% in previous month. Sequentially also, food inflation remained subdued at 0.05% MoM, led by price correction in cereals, fruits and pulses. Reduction in import duty on edible oil will lead to further reduction in food prices. Core inflation, on the other hand, remained steady at 4.28% (vs 4.23% in the previous month), due to increasing gold prices. Monsoon has progressed well covering the entire country almost 10 days ahead of schedule, and rainfall being above normal levels, which should keep food inflation under check. With the expectations of healthy Kharif crop, normal monsoons and comfortable reservoir levels, CPI is expected to remain below RBI’s comfort level of 4%. Core inflation may still remain marginally above 4% with the higher gold prices and base effect. Global uncertainty around tariffs and resultant impact on growth could lead to faster moderation in inflation.
Manufacturing PMI for June rose to a 14-month high of 58.4, from 57.6 seen in the previous month. This has been in continuous expansionary zone for more than a year now. Services PMI increased to a 10-month high of 60.4 in June from 58.8 in May, mainly driven by an increase in the new business index. The index of eight core industries increased by 0.7% YoY in May, which was lower than the 1% YoY growth witnessed in the previous month. Four of the eight core industries reported a rise in production, whereas crude oil, natural gas, fertilizers and electricity registered a decline in output. Cumulative output of eight core industries increased by 0.8% for period April – May 2025, as compared to 6.9% growth recorded in the corresponding period last year.
India’s merchandise trade deficit narrowed to a three-month low at USD 21.9bn in May vs a deficit of USD 26.4bn in April 2025, largely led by contraction in imports, while exports were marginally higher. Net oil imports reduced to USD 9.1bn in May, these were surprisingly high in March and April at about USD 13-14 bn despite the lower crude prices. The trade deficit was partly offset by net services exports of USD 15.2bn, marginally lower than USD 15.9bn recorded in April. On a YoY basis, exports de-grew by 2.2%, largely due to oil exports declining by 30.4% while the non-oil exports remained steady with a 5.1% growth. Imports also declined by 1.7%, driven by lower oil imports (26.2% decline), gold imports (12.6% decline), while the non-oil non-gold imports remained steady with a 11.7% growth. For Q4FY25, current account was in positive territory due to seasonal factors, and recorded a surplus of USD 13.5bn. Capital account recorded a deficit of USD 5.6bn largely due to portfolio outflows and weak net FDI inflows. FY25 recorded a CAD of USD 23bn (0.6% of GDP) vs USD 26bn in FY24 (0.7% of GDP) – recording two consecutive years of comfortable CAD. Capital account was relatively muted with a surplus of USD 16.7bn in FY25 vs USD 89.4bn in FY24. Overall, FY25 BoP recorded a deficit of USD 5bn, vs a strong surplus of USD 63.7 in FY24. FX reserves at the week ending June 20 inched up to USD 697 bn, up from USD 691 bn from the end of previous month.
Central Government’s gross fiscal deficit (GFD) till May 2025 was only 0.84% of its annual budgeted target vs 3.14% during the same time previous year. The low fiscal deficit vs budgeted target has been largely due to RBI dividends which have exceeded budgeted targets, both in the current as well as the previous year. Government receipts till May 2025 grew by 28%, driven by RBI’s dividend and strong GST collections, partly offset by weak direct tax growth at 4.9% YoY. Expenditure increased by 19.7% YoY during April – May 2025, driven by large increase of 54% in government capex. The government collected INR 1.85 trillion GST in June 2025 vs INR 2 trillion in the previous month.
Overall domestic demand and activity levels show moderation. Consumption remains weak, led by slowdown in urban consumption even though rural demand is improving. Slowdown in bank lending is further impacting consumption. Investment cycle remains firm supported by government capex. With decline in food prices, overall inflation remains well within RBI’s comfort zone and will help consumption. Global volatility is expected to remain high and growth is expected to soften amidst US’s tariff policies.