Indian economy resilient despite global headwinds; domestic demand remain strong: RBI bulletin

India's economy has shown resilience despite geopolitical tensions and trade uncertainties, with buoyant domestic demand, strengthening manufacturing and services activity, and a recovery in monsoon supporting kharif sowing, according to the Reserve Bank's August Bulletin.

The "State of the Economy" article said high-frequency indicators for July pointed to sustained economic momentum, while industrial production in June recorded its strongest growth in nearly two years, supported by a broad-based acceleration in manufacturing.

The Index of Industrial Production (IIP) grew 7.3% year-on-year in June, while manufacturing output rose 7.8%.

Capital goods production expanded 14.2%, indicating continued strength in investment-related activity, the bulletin showed.

Domestic demand remained firm in July, supported particularly by rural consumption.

Retail automobile sales grew 25.9%, with tractor sales rising 28.1% and two-wheeler sales 28.3%.

Urban demand also remained strong, with passenger vehicle sales increasing 19.1%.

Petroleum consumption returned to growth in July after three consecutive months of contraction.

Overall petroleum product consumption rose 2.9%, while petrol and diesel consumption increased 9.2% and 10%, respectively.

Services PMI stayed in expansionary territory as railway freight and port cargo traffic recorded healthy growth, and cement production picked up.

The bulletin said merchandise exports rose 19.6% year-on-year to USD 44.2 billion in July, while imports increased 17.5% to USD 76.2 billion.

The trade deficit, however, widened to USD 32 billion from USD 27.9 billion a year earlier and USD 30.4 billion in June, largely due to a higher deficit in electronic goods.

The recovery in monsoon activity in July helped narrow the cumulative rainfall deficit and supported kharif sowing. As of August 14, kharif acreage was at 92% of the full-season normal area, with the gap from the year-ago level narrowing to 2% from 2.9% at the end of July.

The bulletin noted that headline consumer inflation edged up in July, primarily due to food and beverages, while core inflation remained moderate. The Monetary Policy Committee unanimously kept the policy repo rate unchanged at 5.25% in August and retained a neutral stance amid uncertainty over the monsoon, geopolitics and global trade policy.

System liquidity improved in July and August, non-food credit growth stayed healthy, and foreign portfolio investors turned net buyers of Indian equities in July after four consecutive months of outflows.

India's foreign exchange reserves remained comfortable.

The article said India's robust macroeconomic fundamentals continued to provide a cushion against risks from geopolitical tensions in West Asia and fresh US tariffs.

It added that the July recovery in the southwest monsoon had helped kharif sowing move closer to normal, partly mitigating risks to the agriculture sector.