If the chances of a deficient monsoon, as predicted by the India Meteorological Department (IMD), materialise, it would impact the country’s growth-inflation dynamics, the Reserve Bank of India’s State of the Economy report said.
The India Meteorological Department (IMD) has said the south-west monsoon (SWM) rainfall is likely to be below normal this year. The latest data showed the rainfall deficit widening to 42.2 per cent as of June 21 from 28.4 per cent as of June 14.
“An adverse south-west monsoon, if materialised, may weigh on the domestic growth-inflation outlook,” the report, authored by RBI staffers under the guidance of Deputy Governor Poonam Gupta, said.
The views expressed in the Bulletin article are those of the authors and do not represent the views of the Reserve Bank of India.
The RBI has projected real GDP growth for 2026-27 at 6.6 per cent, much lower than FY26 growth of 7.7 per cent, according to the provisional estimates. CPI inflation for 2026-27 is projected at 5.1 per cent.
Commenting on the West Asia conflict, the report said the Indian economy entered this turbulence with much better fundamentals relative to many other countries to withstand the shock.
“India maintained consistently high growth, anchored inflation expectations, sustained fiscal consolidation, a manageable current account balance and foreign exchange buffers over the previous few years, which add to its strength vis-à-vis similar events in the past,” it said. The report also observed that, amid the challenging global environment, the Indian economy grew at 7.8 per cent in Q4FY26, supported by private consumption and fixed investment.
It pointed out that high-frequency indicators during the first two months suggest sustained economic momentum in 2026-27. Domestic demand conditions remained resilient, supported by urban demand.
On inflation, the report observed that despite a pick-up in May, CPI inflation remained anchored. Consumer Price Index (CPI) inflation increased to 3.9 per cent in May 2026 from 3.5 per cent in the previous month, driven by broad-based increases across food, fuel and core components.
“The rise in transport fuel prices reflects the latest adjustment in retail prices by oil marketing companies,” it said. The broad-based pick-up in food prices appears to have continued in June, as suggested by daily price data available up to June 18, it added.
The report said India’s external sector continues to exhibit resilience in terms of a contained current account deficit and foreign exchange reserve buffers.
Among capital flows, FDI inflows gained strength, while foreign portfolio investment (FPI) recorded net outflows since March 2026.
The report said some recent policy measures, including the expansion of the Fully Accessible Route (FAR) to longer-tenor government securities and tax exemptions for foreign investors in government securities, are expected to strengthen demand for Indian sovereign debt and support capital inflows.
On the liquidity situation in the banking sector, the report observed that surplus liquidity conditions moderated in May amid a continued rise in currency in circulation, the Reserve Bank’s forex operations and a build-up of government cash balances.
The situation is expected to ease going ahead, as the drawdown of government cash balances is expected to augment system liquidity following the RBI’s surplus transfer to the government.