US’s tariff related global uncertainties continues to keep the markets on edge as hard data (like US’s consumer spending) remain healthy while the market sentiment indicators show deterioration. 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 has remained steady at 5.2% in April, similar to previous month and higher than 6-month average of 4.6%. In contrast, the consumer sentiment has declined to 52.2 in April & May, against an average of 64.2 in the quarter Jan – March 2025. The dichotomy reflects that tariff related uncertainties have impacted sentiments, but actual ground level impact is yet to be seen. Manufacturing PMIs improved from the previous month to 52.0, remaining in expansionary zone for 5 consecutive months. Services PMI also improved to 53.7 and has remained in expansionary zone for more than a year now. US inflation came lower than expected at 2.3% and core inflation at 2.8% (vs 6-month average of 2.7% and 3.1% respectively), though it still remains elevated. Tariff related uncertainty may impact the inflation trajectory.
India’s GDP growth for March quarter surprised positively at 7.4% YoY with GVA growing at 6.8%. The large difference between GDP and GVA growth is explained by surge in indirect taxes and reduction in subsidy payouts. Investments picked up sharply by 7.8% YoY, supported by pickup in government capex, whereas the Consumption remained subdued with a 4.7% YoY growth. Private final consumption expenditure (PFCE) growth of 6% YoY was partly offset by 1.8% YoY de-growth in Government final consumption expenditure (GFCE). On the GVA front, the 6.8% growth was led by services growth at 7.3% YoY, while industry and agriculture remained relatively subdued at 6.5% and 5.4% respectively.
India’s CPI for April softened more than expected to 3.16%, thereby remaining below the 4% mark for the 3rd consecutive month. The decline in inflation was largely led by food inflation moderating to 2.14% YoY vs 2.88% in previous month. Sequentially also, food inflation declined by 0.1% MoM, marking the 6th consecutive month of decline in food prices, led by sharp correction in vegetable prices. Core inflation, on the other hand, remained steady at 4.22% (vs 4.2% in the previous month), as gold prices kept on an increasing trend. With the expectations of healthy Kharif crop, early onset & 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 Purchasing Managers' Index (PMI) for May declined to 57.6 from 58.2 in the previous month, while being in expansionary zone for more than a year now and above its long-run average of 54.1. Services PMI edged up to 58.87 in April vs 58.7 in the previous month, driven by an increase in the export orders. The index of eight core industries increased by 0.5% YoY in April, which was the lowest level in the past 8 months. Five of the eight core industries reported a rise in production, whereas crude oil, Petroleum Refinery Products and fertilisers registered a decline in output.
India’s trade deficit widened to a 5-month high in April at USD 26.4bn vs USD 21.5bn deficit in March, largely on the back of slowdown in exports and increase in non-gold imports. Non-oil exports which had jumped by USD 6.0bn MoM in March, reversed in April with a USD 6bn decline, indicating that some of the front-loading of exports which was seen in March ahead of the reciprocal tariffs, reversed in April. On a YoY basis, exports grew by 9.0%, with non-oil exports growing by 10.1%, offset by slower growth of 4.8% in oil exports. Imports increased by 19.1%, driven by growth across oil (25.5%), non-oil non-gold (17.3%), as well as gold (4.9%). Net services surplus remained healthy at USD 17.8 bn vs USD 18.1 bn in previous month. FX reserves at the week ending May 30 inched up to USD 691 bn, up from USD 688 bn from the end of previous month.
Central Government’s gross fiscal deficit (GFD) for FY25 came in at 4.77%, slightly lower than the revised estimate of 4.8%. Receipts were around INR 700 bn lower than revised estimates and similarly the Revenue expenditure was also lower by INR 950bn from the revised targets. While maintaining the budgeted fiscal deficit, Govt was able to overachieve the FY25 capital expenditure target, recording a monthly capital expenditure of INR 2.4trillion in March 2025. FY26 has started on a healthy note with government accelerating capital expenditure (including capex loans) with growth of 61% YoY in April 2025. The government has exhausted 11.8% of the annual budgeted target in April. At the same time last year, the government had exhausted 13% of its annual deficit target. Expenditure increased by 10% YoY during April 2025 as government capex spending improved. On the revenue side, net tax collections increased by 2.5% YoY. The government collected INR 2 trillion GST in May 2025 vs INR 2.4 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.