Macro Economic Review

West-Asia conflict entered a much awaited truce with the signing of a memorandum of understanding and a 60-day negotiation window. Crude prices corrected materially post the truce and started trending closer to pre-war levels. With the major risk of crude prices contained for now, focus is shifting to increasing El-Nino and weather-related risks. Overall, lower crude prices should be supportive of the growth-inflation mix.

US Manufacturing PMIs dipped marginally to 53.9 in June 2026 vs 54.5 in May, though has remained in expansionary mode for 11 consecutive months. In contrast, the services PMI inched up to 51.3 vs 50.7 in the previous month. US headline CPI surged to 4.25% in May, up sharply from 3.81% in the previous month on account of the increase in gasoline prices while the services inflation and shelter costs continue to provide a sticky underlying floor. The spillover to core CPI remains limited, which came in at 2.9% vs 2.8% in the previous month. The US non-farm payrolls coming in at 57k in June (vs 129k in the previous month) even as unemployment edged lower to 4.2% (vs 4.3% in May). Despite NFPs coming lower than expected, labour market remained stable as the job growth was sufficient to keep the unemployment rate in check.

India’s GDP growth for March quarter came in at 7.8% YoY (higher than NSO’s estimates of 7.3%), despite the supply disruptions witnessed in March on account of the West Asia crisis. GDP growth was driven by strong investment growth at 11.4% while the consumption remained subdued at 6.8%. The GVA growth for the quarter came in at 7.9%, driven by services which recorded a growth of 9.9% during the quarter. With this print, FY26 GDP growth came in at 7.7% vs 7.1% in FY25, and was marginally higher than NSO’s second advance estimate of 7.6%. However with lower GDP deflator, Nominal GDP growth remained soft at 8.9% vs 9.7% in FY25. Going forward, real GDP growth is expected to slow down in FY27 driven by disruptions in Q1FY27 on account of the West Asia crisis, while nominal GDP is likely to witness an uptick as inflation picks up.

On the domestic front, headline CPI for May came in at 3.94% vs 3.48% in the previous month and was marginally better than market expectations of ~4.02%. The MoM increase was driven by a pickup in food & beverages and part pass through of fuel prices, while core also firmed at the margin. Food inflation increased to 4.54% in May vs 4.01% in the previous month, largely coming from higher vegetable and fruit prices. Underlying food pressures are broadening, with inflation rising beyond just vegetables into food ex vegetables segments. However, the absence of a sharper spike indicates that supply side disruptions remain manageable so far. Fuel prices hikes started from the mid-month and the full impact of fuel price hikes will be reflected from next month’s print. Core inflation firmed to 3.83% yoy, up from 3.40% in the previous month, indicating input cost pressures are gradually feeding through. The personal care segment within the core inflation basket remained elevated and came in at 18.4% yoy on account of increase in prices of precious metals. Going forward, higher El Nino risks will be a key monitorable for inflation as monsoons in June have remained ~43% below normal. However, crude oil prices have sharply corrected by more than 30% to ~USD 72/bbl and if sustained, will provide much respite to the inflation trajectory.

Domestic manufacturing PMI eased to a three month low of 54.2 in June from 55.0 in May, with new orders and output sub-indices both declining sequentially, reflecting cost pressures and some softening in external demand. The Services PMI fell to 57.4 in June from 59.8 in May which was a 17-month low on account of decline in new business index, though remained comfortably above the 50-mark threshold. The index of eight core industries increased by 0.5% in May 2026 with three industries reporting a rise in production and other five reporting a fall. Cumulative output of eight core industries during April – May rose by 1.1%, unchanged from the growth recorded during the corresponding period last year.

Current account was in positive territory in Q4FY26 due to seasonal factors, and recorded a surplus of USD 7.1bn. For the full year FY26, current account deficit came in at 0.6%. This was the third consecutive year of the deficit being below 1% driven by benign crude prices. Capital account recorded a mild surplus of USD 0.1bn in Q4FY26. While portfolio outflows remained high (USD 12bn), it was compensated by inflows on FDI (USD 4.2bn), ECBs and NRI deposits. As a result, Q4FY26 BOP came in at USD 7.2bn surplus. For the full year FY26, BoP recorded a deficit of USD 23.1bn, vs a deficit of USD 4.8bn in FY25. Even as the current account deficit worsens to an extent with higher crude oil prices, the Fx mobilization under the schemes announced by RBI is likely to push the BOP back into positive territory after 2 years of continuous deficit.

India’s merchandise trade deficit remained flattish on a MoM basis at USD 28.2bn in May 2026. While imports increased due to increase in the oil bill, it was offset by a corresponding increase in exports. Net oil imports increased to USD 14.2bn, against USD 8.8bn in the previous month. This was offset by decline in gold and silver imports to USD 3.4bn vs USD 6.0bn on account of the hike in customs duty. On a YoY basis, imports grew by 20.6%, driven by oil and gold imports which grew by USD 53.8bn and USD 34.0bn, respectively. Non-oil non-gold imports grew by 8.6% YoY. The trade deficit was partly offset by net services exports of USD 15.7 bn, lower than the USD 18.6 bn in the previous month. FX reserves declined to USD 672.5bn (as on June 19th), vs USD 682 bn reported at the end of previous month.

Central Government’s gross fiscal deficit (GFD) till May 2026 was 9.57% of its annual budgeted target vs 0.8% during the same time in the previous year. Government receipts till May 2026 recorded a de-growth of 2%, even though gross tax collections grew by 1.8%. This is due to higher devolution to States and de-growth in non tax revenues. The expenditure growth (ex-interest) was elevated at 19% on account of higher subsidies. Capex spending also remained elevated at 13.4% on top of a high base last year. The government collected INR 1.9 trillion GST in June 2026, broadly flattish vs the previous month. Going forward, impact on fiscal due to subsidies (fertilizer subsidy and oil excise cuts) will bear watching. Additionally, the nominal growth trajectory will have to be monitored.

Overall domestic demand and activity levels are expected to moderate in FY27. Investment cycle remains firm supported by government capex. Overall inflation is expected to remain within RBI’s flexible zone of 2 – 6%, elevated El Nino fears will bear watching and push up the food inflation basket. Global volatility is expected to remain high, and an elongated conflict and high crude prices can weaken the growth - inflation dynamics materially.

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