Global Slowdown vs. India’s Growth: How Easing Credit Can Make the Difference

Trade uncertainties continue to weigh on global growth prospects. With on-again off-again tariff situation in USA under Trump administration, there’s constant need to remain vigilant on terms of trade and contribution to domestic growth and inflation. On May 12, 2025, the USA President announced deferring of tariffs on China by 90 days, thus lowering tariffs rates on Chinses goods to 30% from 145% while China brought tariffs on US goods to 10% from 125%, marking a major de-escalation in tariff war.

However, on June 4, 2025, he signed raising of tariffs on steel and aluminium products from 25% to 50%, using tariffs as tool to bring trade partners on negotiating table. All central banks, with exception of the USA and Japan, have eased policy rates anticipating weakening of growth ahead.

The USA, for now, has posted resilient growth performance with jobs data allaying any recession concerns. As per the U.S. Bureau of Labor Statistics, the job openings, at 7.4 million, were little changed in April 2025, with both hires and separations at 5.6 million and 5.3 million in month. The US Purchasing Managers’ Index (PMI) for manufacturing meanwhile rose from 50.2 in April 2025 to 52.0 in May 2025, its highest reading since February 2025, as manufacturers and their customers sought to build inventories ahead of tariff disruptions. China, however, noted weakening of manufacturing activity as new orders declined. The PMI-manufacturing for China noted at 48.3 in May 2025, down from 50.4 in April 2025. A PMI reading above 50 signals expansion of economic activity and vice versa. Japan, meanwhile, sees a rise in long term bond yields.

In India, real GDP growth of 7.4% for Q4FY25 came as relief amidst geopolitical uncertainties with Government spending, especially on capital heads, in H2 compensating for slack in H1FY25. Net exports also supported growth as exporters availed window of opportunity to ship goods before higher US tariffs kicked in. On sectoral basis, Gross Value Added grew 6.8% in Q4FY25, with robust show of Agriculture, Construction and Services, which partly benefitted of Kumbh mela. High frequency indicators for Q1FY26 so far paints a mixed picture on growth. While GST receipts, air passenger traffic growth, diesel consumption, vehicle registrations and toll collections paint better growth in Q1 so far, indicators like PMI, bank credit growth have noted weaker growth compared to corresponding period last year.

Inflation reading meanwhile has consistently come softer, with food item inflation now joining ranks with core inflation. Retail inflation, as measured by Consumer Price Index fell to 3.2% in April 2025 and seen around similar levels for May and June 2025. Further, Monsoon forecast for this year is favourable for low inflation. Encouragingly, easing global growth is likely to keep commodities prices low.

On twin deficits– Fiscal Deficit and Current Account Deficit – India stands better placed than many of peers, creating space for policy support in case of downside surprises on growth, going forward. We are among few nations to have debt-to-GDP on a decline path. With the central bank transferring Rs 2.67 trillion as surplus to Government for 2024-25, that is 27% higher than previous year, there is fiscal room to raise capex spending in the year ahead. The yield on 10-year government of India bonds have rallied to 6.2%, anticipating further easing of policy rates by RBI while Government adheres to fiscal prudence.

On banking, credit growth remains subpar even as deposit mobilisation has turned comfortable. With the RBI adopting accommodative monetary stance, system liquidity has turned to surplus, averaging Rs 1.7 trillion in May 2025 and likely to remain such in months ahead. There remains, however, wide disparity in liquidity amongst banks. Easier liquidity is enabling for rate cut transmission but there is need to take macro, and micro-prudential measures to ease constraints on credit to industry to support India’s higher growth aspirations. Monetary transmission will be constrained by banks shrinking interest margins as they likely delay revising marginal cost-based lending rates (MCLR) to offset interest loss on external benchmark-based lending rates (EBLR), where transmission is instantaneous. It is time to see reduced cost of capital translate in higher credit growth, especially for industry, which has seen continuous slide in share in bank credit for last decade.

At a time, global growth is stuttering below 3%, India sustaining a growth of 6.5% and above calls for concerted response from all stakeholders. Low and stable inflation indeed offers space for further monetary accommodation from the RBI.