Global growth prospects are seen somewhat better as trade borne uncertainties settle down, albeit with US tariffs at elevated levels. The International Monetary Fund (IMF) in July 2025 update of World Economic Outlook revised its global growth projections to 3.0% and 3.1% for 2025 and 2026 respectively, an increase of 20 basis points (bps) and 10 bps respectively from April 2025 estimate.
China noted significant 80 bps upgrade to growth outlook for 2025 as it navigated the first half of year skillfully, front-loading exports to the USA before Trump tariffs took effect. Global Purchasing Managers Index (PMI) too signal improved activity even as front loading of trade played in Q2, 2025.
The US Federal Reserve opting to maintain status quo on federal funds rate in July review, signals caution on price situation as tariff situation evolves. The latest release of jobs data for July 2025, however, with marked downward revisions for May and June, showed a weaker growth outturn in the largest economy. This has raised the odds of the US Federal Reserve opting for rate cut in September 2025 review. The IMF also upgraded India’s growth outlook to 6.4% for both 2025 and 2026, an increase of 20 bps and 10 bps respectively for both years on more benign external environment.
Trump administration, meanwhile, announced tariff at 25% for India as no deal materialized by end of July 2025. Trump also proposed to put a penal rate in secondary tariffs for India’s energy imports from Russia, which after refinement, reach Western economy shores. We need to await the details, especially as both parties have shown willingness to clinch a deal in near future. In a way, in the worst-case outcome, US treasury collects about USD 16 – 18 billion on Indian exports to the US in tariffs applicable on 3/4th of US imports from India, which stood USD 86.5 billion in FY25. On sector basis, jewelry, textiles, phones and industrial machinery to see bulk of impact given their high share in India’s exports to USA.
On secondary tariffs, India is unlikely to yield ground much, specifically on energy and defense choices which are key to India’s sovereignty in a multipolar world. India remains fairly placed to navigate the high tariff world as services remain key to India’s export resilience. On manufacturing, however, we have a long road ahead to become globally competitive. The UNIDO Competitive Industrial Performance Index 2023 ranked India at 37 among 153 countries sample with India’s index value at 0.079 vs world average of 0.063.
Government has shown will to remove barriers to productivity, but there is a lot that still needs to be done, including rising on technology frontier and building sustainable market advantage.
Indian rupee, nevertheless, will have to bear with selling pressures in near term as the US Dollar gains ground on trade and flow disruption.
Coming home, high frequency indicators remain mixed on growth outturn in FY26. Industry output growth remains moderate, especially mining and electricity. Vehicle sales remain encouraging. At 24.5% of budget estimates (BE) for FY26, central government spending in April-June 2025 quarter has been better than last year (16.3% of BE). Monsoon rains have progressed well though uneven regional spread warrants caution on regional level price dynamics. Further, at 59.1, India’s manufacturing PMI noted solid expansion in July, buoyed by accelerated expansion in new orders.
Bank credit growth has fallen to single digits, trailing deposits growth, signaling demand concerns weighing on loan offtake. In a liquidity surplus environment, banks risk chasing borrowers by sacrificing margins. The financial results of April-June quarter have affirmed margin pressures while there was a moderate rise in NPAs across the banking spectrum. More worrying is lenders dropping guard on credit risk, playing opportunistically while mispricing risk just to build balance-sheet. India has seen this play before, and it did not end well. Even as growth warrants credit stimulus, we should opt to lend better and not just lend more.
Inflation has behaved well in the financial year so far, even trailing the RBI estimates (2.7% actual vs 2.9% estimate for Q1, FY25). Consumer price index-based headline inflation softened below 3% led by food items while non-food core inflation remained steady around 4% levels. The wholesale price index-based inflation turned negative in June, signaling low pricing power for manufacturers. Seen from growth-inflation perspective, there is space to ease the policy rates by 25 to 50 bps further in financial year. However, from the perspective of financial stability, the regulator will be watchful with readiness to ease if situation evolves better.
