Indian Economy: The comfort of home

When global uncertainties are high and private corporate investment opportunities limited, the focus shifts to private consumption, which accounts for nearly 57% of India’s gross domestic product (GDP) and serves as a crucial support for the economy. 

After the slow growth in private consumption in fiscal 2024, it accelerated in fiscal 2025. We anticipate private consumption will maintain momentum and grow slightly faster than GDP in the current fiscal as well. 

Moreover, private consumption is expected to become more widespread this fiscal, with increased contribution from urban areas. Factors such as lower interest rates, tax cuts for the middle class and moderation in food inflation will drive the urban consumption recovery compared with the previous fiscal. Rural consumption remains robust, supported by sufficient rainfall, rising agricultural and non-agricultural wages, and increased government funding for income-generating programs. 

However, trends in private consumption have been mixed so far. While rural consumption remains strong, a significant boost in urban consumption is still awaited. 

This month's main story explores the prospects for private consumption and its rural and urban dynamics. 

Meantime, despite a sharper-than-expected decline in inflation, which was 2.1% in June, and expectations of a further drop following the monetary policy announcement, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has kept its policy rates steady. The RBI revised its inflation forecast to 3.1% for this fiscal and kept the growth forecast steady at 6.5%. 

We believe there is a likelihood of a 25 basis points (bps) cut in the repo rate as growth risks continue to outweigh those from inflation. Additionally, with the phased cuts in the cash reserve ratio starting in September, the transmission of the 100 bps reduction in the repo rate so far this fiscal will improve further, leading to lower lending rates. 

At this juncture, the primary risk to growth is external, stemming from high tariffs imposed by the United States (US) and a slowing global economy. A 50% increase in the tariff levied by the US on India-25% reciprocal plus another 25% secondary sanctions as a penalty for buying Russian oil-took effect from August 27. 

Based on the recent experiences of other countries that have successfully negotiated trade agreements with the US, the eventual tariffs could decrease from these levels.