Do it yourself

 The Niti Aayog published a working paper titled “India’s Path to Global Leadership: Strategic Imperatives for Viksit Bharat @2047”, in April 2025. The paper presents a roadmap for India’s economic growth, encompassing sustainability, social inclusion, national security, and global leadership.

The Indian stock market has once again demonstrated its remarkable ability to weather turbulent times. Despite significant geopolitical headwinds, including the Indo-Pak tensions in April 2025 and the escalating Iran-Israel conflict in June 2025, the benchmark Nifty 50 has shown resilience, recouping losses swiftly and even posting gains. Month-to-date (MTD) in June 2025, the Nifty 50 has its ground firmly , despite threatening news flow, a weakening rupee, and surging oil prices. Trading volumes on the National Stock Exchange (NSE) have surged, even as foreign portfolio investors (FPIs) are only marginal net buyers and promoter entities offloaded over ₹400 billion in shares. Meanwhile, domestic institutional investors (DIIs) have though accelerated their buying and providing support to the market.

One may argue that this tendency to quickly overcome geopolitical shocks isn’t new. Over the past five years, the Nifty 50 and Sensex have delivered annualized returns of 10-12%, navigating challenges like the COVID-19 pandemic, global inflation, and geopolitical tensions.

Notwithstanding, this resilience raises two important questions: (1) Has the market fully priced in the short- to medium-term impacts of these geopolitical and economic challenges? And (2) IS the current investors positioning aligned with this collective wisdom, or are they holding back, waiting for clearer signals?

1.    Has the market fully priced in the short to medium-term impact of the current geopolitical and economic conditions?

The market’s muted reaction to rising oil prices and geopolitical escalation suggests that participants may indeed be looking past the immediate risks. Historically, sustained oil prices above $90/barrel tend to spook emerging markets, especially net importers like India. Yet, the INR and benchmark yields have only weakened modestly, indicating a lack of panic among both equity and debt investors.

There is also precedent for such behavior. During the Russia-Ukraine conflict in early 2022, the Nifty corrected nearly 10% in a month before stabilizing as investors shifted focus to earnings resilience and strong domestic demand. A similar pattern appears to be playing out in 2025, as the market leans on India's improving macro fundamentals: GST collections remain robust (₹1.72 lakh crore in May), credit growth continues to trend above 16%, and manufacturing PMI remains in expansion territory.

It is worth noting that the USDINR has depreciated less than 1% MTD, driven by risk-averse sentiment and dollar demand from oil importers. Crude oil prices, a critical factor for India (which imports over 80% of its crude), spiked over 10% to $76-77 per barrel following the Iran-Israel escalation, raising concerns about inflation and the current account deficit. However, retail inflation remains at a six-year low of 2.82% in May 2025, bolstered by a favorable monsoon and RBI’s recent rate cut, providing a cushion against these pressures.

Overall, the market seems to be assigning a lower probability to these conflicts escalating into scenarios that could derail India’s domestic growth story. The base case appears to be a temporary disruption with limited spillover effects—at least economically.

A prolonged Middle East conflict could disrupt oil supplies through the Strait of Hormuz, pushing Brent crude to $120 per barrel, which would strain India’s fiscal balance and reignite inflation. Similarly, sustained FPI outflows, driven by high valuations or cheaper Asian markets like China, could cap upside. Still, the market’s ability to hold above key support levels (24,700 for Nifty) and the absence of strong selling pressure suggest that investors are comfortable with current price levels for now.

2.    Are market participants aligned with this view—or are they still waiting for more evidence?

Positioning data tells a mixed story. While domestic institutions (mutual funds, insurance companies) have stepped up their buying—net purchases exceeding ₹600 billion in June so far—retail flows have plateaued. Systematic Investment Plans (SIPs) remain steady (₹20,900 crore in May), but net retail participation has softened somewhat in the derivatives and midcap space.

Moreover, futures & options positioning shows high open interest in index puts, suggesting that institutional players continue to hedge downside risks. Volatility, as measured by the India VIX, has edged up slightly (hovering around 14), indicating guarded optimism rather than outright bullishness.

Promoter selling—over ₹400 billion MTD—further complicates the narrative. While such activity isn’t uncommon ahead of Q2 fundraising or capital reallocation plans, it typically reflects either a valuation comfort zone or a strategic liquidity need. Given that this selling has not dented broader sentiment significantly, one could argue that other market participants are either confident in the underlying fundamentals—or are simply waiting for further clarity before making directional bets.

What does this mean going forward?

The current market resilience could very well be the product of a differentiated outlook: that India’s domestic story is strong enough to weather external shocks. But caution is clearly visible in the way participants are positioned—through hedges, elevated cash levels among HNIs, and selective buying rather than indiscriminate accumulation.

Until there is clarity on crude oil’s trajectory, the rupee’s stability, and the potential policy response from global central banks (especially the Fed’s July meeting), markets are likely to stay range-bound with a mild upward bias. Earnings upgrades in auto, banking, and infra sectors offer a supportive backdrop, but investors will want confirmation via Q1FY26 numbers before going all-in.

Conclusion

The collective wisdom of the market seems to have largely priced in current risks, but positioning suggests that investors are not fully aligned with this outlook—yet. Resilience, yes. Conviction, not quite. A ‘better than expected’ 1QFY26 performance could enhance conviction and pull the fence sitters in.

A famous fund manager recently expressed serious concerns about a “financial crisis” that is just about to hit the Indian middle-class households (see here). In a podcast with Mint, he said, “With household financial savings at a 50-year low and debt levels (excluding mortgages) among the highest globally, the country is dangerously unprepared for a looming wave of tech-driven job disruption.” He was apparently referring to the disruption created by the popularity of “Artificial Intelligence” (AI) in the global job market.

I have no disagreement with the analysis of this gentleman. In fact, to a large extent I do agree with his concerns. The fabled Indian middle class may indeed be facing an unprecedented crisis. However, I have my reservations about AI causing or accentuating this crisis. I firmly believe that this advancement in technology, just like all the previous ones, will definitely improve overall employment prospects, in particular, and quality of life, in general.

If anything, I see AI — like past technological leaps — as a net enabler. The threat isn’t AI; it’s how unprepared we are to adapt to it.

History is full of examples where transformative technology triggered fear, resistance, and dire predictions — most of which didn’t age well. For example, note the following developments.

·         In the 19^th century, grave concerns were expressed about the adverse impact of using motorized vehicles. Concerns were raised about the potential dangers of motorized vehicles to horse riders and horse-drawn carriages, especially in terms of speed and noise. The British Parliament devoted significant time on debating (i) potential displacement of horse-related industries, such as carriage building and horse feed businesses; and (ii) the potential dangers of motorized vehicles to horse riders and horse-drawn carriages, especially in terms of speed and noise.

The Locomotive Act 1865 (Red Flag Act), a historical example of resistance to technological progress, was passed to impose strict speed limits (4 mph in the country, 2 mph in towns) and require a person to walk ahead of every motorized vehicle waving a red flag to warn horse traffic.

The Highways and Locomotives (Amendment) Act 1878 and the Locomotive on Highways Act 1896 eventually relaxed these restrictions, reflecting growing acceptance of motor vehicles.

·         Employees’ unions of Public Sector Banks in India went on a 10 days strike in early 1990s, when the government decided on computerization of banking operations to improve efficiency and scalability. Job security was their prime concern. By October 1993, unions reached a Computerization Settlement Agreement with the Indian Banks' Association (IBA). This agreement allowed for the gradual introduction of technology in PSBs, with assurances to protect jobs and involve unions in the process. By 1998, about 25% of PSB branches were partially or fully computerized, increasing to 50% by 2001. The adoption of Core Banking Solutions (CBS) and technologies like ATMs transformed Indian banking, improving efficiency and customer service. In the following two decades the banking network expanded at a record pace. The job opportunities created by the expansion were exponentially higher.

·         In the mid-1990s computerized trading platforms (first OTCEI and then NSE) were introduced in India. The traditional stock exchanges resisted the move, fearing that the people employed in the floor based open cry trading system will become unemployed and traditional stock brokers may not be able to adapt to the new technology. Within one decade, the stock markets in India had grown exponentially, creating a significantly higher number of job opportunities.

·         In the mid-1990s, Indian farmers, particularly through organizations like the Karnataka Rajya Raitha Sangha (KRRS), staged massive protests against India’s integration into the World Trade Organization (WTO) and the General Agreement on Tariffs and Trade (GATT). The Uruguay Round of GATT concluded in 1994, leading to the establishment of the WTO in 1995. The AoA aimed to liberalize agricultural trade by reducing subsidies and trade barriers, which farmers feared would favor developed nations and multinational corporations. A 1993 rally organized by Vandana Shiva and others saw 500,000 farmers protest against GATT/WTO, highlighting fears of losing food sovereignty. Protests continued into 1995–1996, with farmers’ groups like KRRS and the Bharatiya Kisan Union (BKU) organizing marches, seed satyagrahas (non-violent resistance to save indigenous seeds), and public campaigns to demand India’s withdrawal from the WTO.

It was feared that Liberalized trade would flood Indian markets with cheap, subsidized imports from developed countries, undercutting local farmers. The government however managed to negotiate protections for Indian farmers, such as maintaining MSP and public procurement systems.

Advent of smartphones made several legacy products and technologies like camera and radio etc. redundant; but it democratized creativity and access. The market for music has grown several times, offering opportunity to millions of new performers who would have struggled to get noticed. Millions of enthusiasts have taken to photography, caricatures, dancing, acting, etc. People living in obscure corners of the country can easily access global audiences and markets for their products and talents.

“Artificial Intelligence”, in my view, will similarly democratize several professions, e.g., software development, designing, teaching, governance, farming, etc. It could enhance efficiency several times, just like the commercialization of internal combustion engines (ICE) and the internet did in the 20^th century.

I am not oblivious of the fact that almost half of present-day jobs in developed economies could be at risk of automation, with similar risks in emerging markets like India, particularly in IT and service sectors. Nonetheless, I am not unnecessarily worried about this. But history shows these disruptions are often overstated, and adaptation creates more jobs than it destroys.

I am able to foresee millions of new business ideas and software applications coming out of ordinary households just like the entertainment reels (short video clips) are coming these days. Of course, there could be a pain period as the new job opportunities may emerge with a lag, while disruption may be immediate.

What actually worries me is the fast degenerating public school education system in India. The divide between quality private education (affordable for top 10% of the student population) and poor quality private and public education (availed by the 90%) is widening every year. This divide shall perpetuate the income and wealth inequalities in the country and prevent it from a democracy in the true sense. We may continue to remain a feudal society dominated by a few.

AI isn’t the villain; it’s a tool that can empower millions if we prepare for it. The real crisis is our failure to equip the next generation to seize those opportunities. More on that soon.

 Where did we lose our way?

My engagement with Indian financial markets began in the late 1980s, at a time when the winds of reform had just started sweeping through the economy. What followed in the 1990s was a structural reset — the kind that lays the foundation for decades of growth, even if its full implications aren’t immediately visible.

The decade of 1990s witnessed –

(i)    An overhaul of the financial sector with abolition of capital controls, opening of doors for the foreign portfolio investors, entry of private banks in the markets, material liberalization of the rules for non-bank lenders (NBFCs); laying foundation for pension and insurance sector reforms;

(ii)   Significant liberalization of the industrial licensing system; material dilution of the Monopolies and Restrictive Trade Practices Act and Foreign Exchange Regulation Act, de-reservation of several articles from Small Scale Industries, introduction of Liberalized Exchange Rate Management System (LERMS), etc.;

(iii)  India becoming a signatory of the World Trade Organization. (Of course, India was a signatory to the GATT since 1948);

(iv)  Simplification of excise classifications, introduction of VAT and MODVAT, material reduction in maximum marginal rates of IT Act and simplification of rules;

(v)   Beginning of disinvestment and divestment process in public sector enterprises (PSEs). The government initiated disinvestment of its stake in many non-strategic PSEs. More importantly, the government divested government monopolies in core sectors like Oil& gas, Power, Coal, Roads, Ports, Civil Aviation, Communication, etc.

(vi)  India gained recognition as a major center of information technology (IT) and pharmaceutical research and development center in the world. For the first time, thousands of Indian professionals (Software Engineers & developers, Bankers, doctors and Managers) started working and travelling across the globe, unlike decades when Indian worker mostly got low paid blue-collar jobs.

(vii) Strategically, India was recognized as a country having a nuclear deterrent. Significant advances were made in development of missile and space research technologies.

All these developments gain higher importance when we consider that this was the era of significant political instability (minority governments 1989-1995, and then three general elections during 1995-1998) and financial constraints (Balance of Payment crisis in early 1990s, economic sanctions post nuclear tests in 1998, massive stock market scams, financial sector crisis and bankruptcy of multiple development financial institutions like UTI, IDBI, ICICI, IFCI).

More notably, till 1990 Indian and Chinese economies were mostly at par. We could even say that India had a marginal edge over China as it had wider global acceptance due to its democratic traditions. China also started its economic transformation around the same time. In 35 years, the Chinese economy has sprinted miles ahead of the Indian economy. No one, not even Indian politicians, is claiming that we are even in the race to bridge this gap in the foreseeable future.​

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This morning, I am writing this after reading about 20 equity research reports. All these reports, without even a single exception, have expressed worries about inflation and CAD due to the spike in crude oil prices in the global markets. It felt like déjà vu.

Back in 1990-91, as the Gulf War broke out, crude prices spiked and sparked the same anxiety. Three decades on, monsoon dependency and crude oil shocks remain headline risks for the Indian economy. Three decades later, nothing seems to have really changed - we’re still haunted by monsoon uncertainties and oil shocks.

Despite a decade of brave reforms and a globalized capital base, India’s macro vulnerabilities remain eerily similar. Our reforms deepened markets and broadened participation, but left key structural risks unaddressed.

So, the question we need to ask is “where did we lose our way in the past couple of decades?”

To me, India’s growth story remains compelling, but ignoring its macro vulnerabilities is difficult. The past teaches us resilience but the future demands vigilance.

The Middle East is once again a tinderbox, with the escalating Israel-Iran conflict threatening to spiral into a broader global crisis. Unlike the recent Indo-Pak hostilities, which remained contained, this clash carries the potential to draw in multiple nations, disrupting global trade and energy markets. For India, which is heavily reliant on energy imports, the stakes are high. While India has reiterated its neutral stance, the ripple effects of a prolonged conflict could significantly impact its energy security, inflation, current account balance, INR exchange rate, fiscal stability, and overall economic growth prospects.

The recent violence in Los Angeles, California, stemming from protests against Immigration and Customs Enforcement (ICE) raids starting June 6, 2025, has evoked strong responses from global communities. The militarized response to what began as localized unrest has triggered a much wider debate, both within the United States and internationally. The deployment of 2,000 National Guard troops and the placement of 700 U.S. Marines on “high alert,” coupled with the use of tear gas, rubber bullets, and curfews, has drawn sharp criticism. This heavy-handed approach is not entirely unexpected, given President Trump’s experience with the 2021 Capitol Hill riot, which underscored his administration’s preference for forceful responses to civil unrest. The ensuing tension between the California state government, led by Governor Gavin Newsom and Mayor Karen Bass, and the federal government has raised further concerns about governance, human rights, and the risk of escalating conflict.

The global response has been swift and critical. The United Nations has called for de-escalation, urging U.S. authorities to avoid “further militarization” of the response to the LA protests and to uphold the right to peaceful assembly. Australian Prime Minister Anthony Albanese expressed concern over the handling of the unrest, particularly the use of rubber bullets. Canada, Ireland, Germany, and the Netherlands have issued travel advisories for their citizens visiting the U.S., citing risks of detention due to aggressive immigration enforcement. Amnesty International USA condemned the deployment of National Guard troops as an “unnecessary militarized reaction” aimed at “crushing dissent” rather than protecting communities. Human Rights Watch (HRW) framed the LA protests as part of a broader fight for human rights in the U.S., noting that ICE raids targeting sensitive locations like courthouses, schools, and workplaces have sparked nationwide demonstrations. The Economist described the U.S. administration’s response as appearing to “create confrontation” and fuel a “cycle of protest, violence, and repression” for political gain, rather than prioritizing order.

Notably, the U.S. is not alone in witnessing violent protests or militarized responses to civic unrest, particularly in recent years. Civilians have faced brutality in active war zones like Israel-Palestine and Russia-Ukraine; in terrorism- and gang-war-infested countries such as Pakistan, Sudan, Somalia, Syria, Lebanon, Colombia, Venezuela, Ecuador, Peru, South Africa, and Kenya; and in nations governed by non-democratic regimes, including Myanmar, Bangladesh, the Democratic Republic of Congo, and Haiti. In India also, ethnic violence and alleged state oppression in Manipur have led to civilian suffering, internet shutdowns, and persistent unrest. These cases highlight a grim reality: the use of force against civilians is a global phenomenon, often exacerbated by weak governance, conflict, or authoritarianism.

Yet, the phenomenon of violent protests and their suppression by force is not confined to the developing world or conflict zones. Developed democracies like Canada, France, the United Kingdom, Germany, the Netherlands, Ireland, Belgium, and Spain have also experienced significant civil unrest in recent years. The Allianz Risk Barometer 2025 identifies France, the UK, Germany, and Spain as global hotspots for protest and riot activity, with over 80,000 incidents recorded in 2024 alone. In France, protests over economic policies and immigration have frequently turned violent, while the UK has seen riots linked to immigration and political polarization. Germany and the Netherlands have faced farmer protests and demonstrations over energy costs, and Ireland has grappled with tensions over immigration policies. These parallels with the U.S. and Canada underscore a troubling trend: even stable democracies are not immune to the forces driving public discontent and violence.

In most cases, the catalysts for violent civilian protests are clear: restrictive immigration policies that limit labor mobility, economic stress inducers, e.g., unemployment, inflation, and unfair taxation, curbs on personal liberties such as religious freedom or reproductive rights, suppression of ethnic or religious minorities, and deepening political polarization. These issues, while diverse, share a common thread: they erode trust between governments and their citizens, creating fertile ground for unrest. The Los Angeles protests, sparked by ICE raids targeting immigrant communities, exemplify how policy decisions can ignite broader social tensions, particularly when met with disproportionate force.

In my view, the primary reason behind the rise in violent tendencies in recent times is the overwhelming dominance of divisive and parochial political agendas across the world. Statesmanship, a hallmark of much of the 20th century, has all but vanished from the global stage. The world once saw leaders like Franklin D. Roosevelt, Winston Churchill, Nelson Mandela, and Nehru, who, despite their flaws, prioritized unity, long-term vision, and humanitarian values over short-term political gains. Today, too many leaders are elected on platforms that amplify division, fear, and narrow self-interest. These leaders often lack a global perspective or a commitment to addressing the root causes of unrest—poverty, inequality, and injustice. Instead, they resort to populist rhetoric or militarized responses, further alienating their citizens and fueling cycles of protest and repression.

The absence of statesmanship is not just a leadership failure; it is a systemic crisis. Global challenges like climate change, migration, and economic inequality require cooperative, forward-thinking solutions, yet many leaders prioritize domestic political survival over collective progress. In the U.S., the LA unrest reflects a failure to bridge divides between immigrant communities and policymakers, exacerbated by a federal response that prioritizes control over dialogue. Similarly, in Europe, protests over immigration and economic policies highlight a disconnect between governments and their increasingly frustrated populations. Even in war-torn regions like Sudan or Myanmar, the lack of visionary leadership perpetuates cycles of violence and displacement.

To break this cycle, the world urgently needs a new generation of statesmen and stateswomen—leaders who can rise above parochial agendas and embrace a humanitarian approach to governance. These leaders must prioritize dialogue over confrontation, addressing the root causes of unrest rather than merely suppressing its symptoms. For instance, immigration policies could focus on integration and economic opportunity rather than punitive enforcement, as seen in the LA raids. Economic reforms could tackle inequality and inflation through inclusive growth, rather than austerity measures that disproportionately harm the vulnerable. Political polarization could be countered by fostering civic engagement and rebuilding trust in institutions, rather than exploiting divisions for electoral gain.

Moreover, the international community has a role to play in fostering statesmanship. The UN, regional organizations, and civil society must hold leaders accountable for human rights abuses and militarized responses, while supporting initiatives that promote peacebuilding and social cohesion. Grassroots movements, empowered by technology and global connectivity, can also pressure governments to prioritize the common good over divisive politics. Education and public discourse must emphasize empathy, critical thinking, and global citizenship, equipping future leaders to navigate an interconnected world.

The violence in Los Angeles, like unrest elsewhere, is a symptom of a deeper malaise: a world led by division rather than vision. The global outcry over the LA protests—whether from the UN, human rights groups, or concerned citizens on platforms like X—signals a shared desire for change. Yet, change will not come without leadership that transcends borders, ideologies, and short-term gains. The world urgently needs statesmen and stateswomen who can heal divides, inspire hope, and forge a path toward a more just and peaceful future. Only then can we move beyond the cycles of protest, violence, and repression that define our time.

 While the 7.4% GDP growth number for 4QFY25, and claims of continuing strong growth momentum in April 2025 are encouraging, the RBI assessment of FY26 growth and aggressive policy stance raise some doubts. A careful analysis of the GDP data released by the NSO also leaves some doubts about the consistency and sustainability of the 4QFY25 growth numbers.

Many economists have noted discrepancies and incongruencies in the data, as well as comparisons with other economic indicators and external analyses.

For example, I found the following noteworthy.

Discrepancy Between GDP and GVA Growth Rates

In Q4 FY25, GDP growth is 7.4%, while GVA growth is 6.8%. The divergence between GDP and GVA growth rates is notable, as GDP includes net taxes (taxes minus subsidies), which can distort the picture of underlying economic activity captured by GVA.

The gap suggests that tax revenues or subsidy adjustments may have inflated GDP growth relative to GVA. For instance, higher GST collections or reduced subsidies might have boosted GDP figures without reflecting proportional growth in actual economic output. This discrepancy raises questions about the sustainability of growth driven by fiscal adjustments rather than core sectoral performance.

As per Systematix research, “Recent robust GST collections have been interpreted as evidence of strong economic growth, supporting the 4QFY25 real GDP growth of 7.4%. However, this narrative contrasts with on-ground economic indicators suggesting a demand slowdown. Our analysis reveals that rising GST collections stem not from stronger economic growth but from increased indirect tax incidence in a slowing economy. This trend aligns with the government’s pro-cyclical fiscal tightening framework over recent years. We estimate an excess tax collection of INR 2.9 trillion over the past two years (2QFY24–1QFY26E), which has elevated the net indirect tax burden on Indian households to a historical peak. This has suppressed household spending power, exacerbating the lack of real income growth.”

Q2 FY25 Growth Slowdown vs. Q4 Recovery

2QFY25 reported a seven-quarter low GDP growth of 5.4%. 1QFY25 growth slowdown could be explained by the spending restrictions due to the imposition of the model code of conduct during the general elections (March-June 2025). Logically, 2QFY25 should have witnessed excessive government spending due to spillover effects from the previous quarter.

The rapid recovery from 5.4% in Q2 to 7.4% in Q4 appears inconsistent with the broader FY25 growth of 6.5%, suggesting uneven economic momentum. The low Q2 growth was attributed to reduced government spending and weak private investment, but the factors driving the Q4 rebound (e.g., manufacturing and construction) are not fully explained in the press release.

Sectoral Growth Inconsistencies

Agriculture (3.8% in FY25)

The agriculture sector’s growth improved significantly from 1.4% in FY24 to 3.8% in FY25, attributed to a good monsoon. However, this contrasts with reports of uneven monsoon distribution and challenges like low reservoir levels in some regions, which could have limited agricultural output in certain areas.

The uniform 3.8% growth figure may mask regional variations or overstate the sector’s recovery, especially since agricultural income growth (e.g., farm wages) has not kept pace, as noted in some external analyses.

Manufacturing (5.0% in FY25)

Manufacturing growth slowed sharply from 9.9% in FY24 to 5.0% in FY25, yet Q4 FY25 GDP growth (7.4%) suggests a manufacturing rebound. This is inconsistent with high-frequency indicators like the Index of Industrial Production (IIP), which showed subdued industrial activity in most parts of FY25.

The slowdown aligns with high input costs and weak export demand, but the Q4 recovery lacks detailed sectoral data to confirm whether manufacturing truly drove the uptick or if other factors (e.g., statistical adjustments) played a role.

Construction (9.4% in FY25)

Construction grew at 9.4%, down slightly from 10.4% in FY24, yet government capital expenditure reportedly slowed in FY25. This raises questions about the source of growth, as public infrastructure spending is a key driver of construction.

Private sector construction (e.g., real estate) may have contributed, but the press release does not disaggregate public vs. private contributions, creating ambiguity.

Expenditure-Side Discrepancies

Private Final Consumption Expenditure (PFCE) grew at 7.2% in FY25 (up from 5.6% in FY24), indicating strong household spending. However, this contrasts with external reports of weak rural demand and urban consumption slowdowns, particularly in discretionary goods (e.g., automobiles, FMCG).

The robust PFCE growth may be driven by urban or high-income consumption, but the lack of granular data obscures whether this reflects broad-based demand or is skewed by specific segments.

Government Final Consumption Expenditure (GFCE) growth slowed to 2.3% in FY25 from 8.1% in FY24, reflecting fiscal consolidation. However, the strong Q4 GDP growth (7.4%) and high growth in public administration (7.8%) suggest continued government spending in certain areas, creating a potential mismatch.

The low GFCE growth may understate government contributions in Q4, or the sectoral growth in public administration may reflect non-expenditure factors (e.g., statistical adjustments).

Gross Fixed Capital Formation (GFCF) growth slowed to 7.1% in FY25 from 8.8% in FY24, indicating weaker investment. This aligns with reports of sluggish private investment but contrasts with the strong construction sector growth (9.4%), which typically relies on capital investment.

The disconnect suggests that construction growth may be driven by specific sub-sectors (e.g., real estate) rather than broad investment, but the press release lacks clarity on this.

Mismatch with High-Frequency Indicators

The GDP growth of 6.5% for FY25 and 7.4% for Q4 FY25 appears optimistic compared to high-frequency indicators like-

Index of Industrial Production (IIP): Showed weaker industrial growth, particularly in manufacturing, contradicting the Q4 rebound.

Purchasing Managers’ Index (PMI): Indicated slower manufacturing and services activity in parts of FY25.

Core Sector Output: The eight core industries (e.g., coal, steel, cement) showed subdued growth in some quarters, inconsistent with the strong construction and manufacturing contributions in Q4.

These indicators suggest a more sluggish economy than the NSO’s GDP figures imply, raising concerns about potential overestimation or statistical discrepancies in the GDP calculations.

Comparison with External Forecasts

The NSO’s FY25 GDP growth estimate of 6.5% is lower than the Reserve Bank of India’s (RBI) revised forecast of 6.6% (down from 7.2%) but higher than some private forecasts (e.g., 6.0–6.3% by agencies like ICRA or SBI). The Q4 growth of 7.4% also exceeds many analysts’ expectations (e.g., 6.8% median estimate).

The higher-than-expected Q4 growth and the annual estimate suggest either a stronger-than-anticipated recovery or potential overestimation in the NSO’s provisional data. The reliance on provisional estimates, which are subject to revision, adds uncertainty.

Other disconnects

There are some other disconnects in the GDP data. For example, the nominal growth in 4QFY25 at 10.8%, much ahead of money supply growth of 9.6% is fully explained. A growing economy would usually need higher money supply due to higher transaction demand. This mismatch can probably be explained by the use of an erroneous deflator. Besides, external trade data, sharp contraction in subsidy payments etc. also raise some doubts.

Also read

The state of the Indian economy

The Indian economy – glass half full

The Indian economy – glass half empty

RBI makes a bold bet

The Reserve Bank of India’s (RBI) monetary policy statement on June 6, 2025 marked a significant shift in India’s monetary policy framework, reflecting a bold approach to stimulate economic growth while navigating global uncertainties and domestic inflation dynamics.

Policy rates cut by 50bps to support growth

The Monetary Policy Committee (MPC) reduced the policy repo rate by 50 bps to 5.50%, a larger-than-expected cut compared to market expectations of a 25bps reduction. This was the third consecutive rate cut in 2025, following reductions in February (6.5% to 6.25%) and April (6.25% to 6.00%). Consequently, the Standing Deposit Facility (SDF) rate was adjusted to 5.25%, and the Marginal Standing Facility (MSF) rate and Bank Rate to 5.75%.

This sharp cut in rates is aimed at accelerating the growth. Pertinent to note that FY25 real GDP grew by 6.5% yoy, and is expected to grow at a similar or lower rate in FY26. Considering the fragile global conditions, it is imperative to support the domestic economy maintaining a healthy growth momentum.

The rate cuts are expected to stimulate credit demand, private consumption and capex demand. At least four public sector banks (BoB, PNB, BOI, UCO) have reportedly cut their repo linked lending rates by a matching 50bps.

Cash Reserve Ratio (CRR) requirement reduced by 100bps

The RBI decided to lower the CRR for scheduled commercial banks by 100 bps to 3.0% of Net Demand and Time Liabilities (NDTL). This cut will be implemented in four tranches of 25bps each, starting September 6, 2025, through November 29, 2025. This aims to enhance liquidity in the banking system.

This 100bps cut in the CRR would potentially release an additional Rs2.5 trillion liquidity in the banking system in the busy season. Notably, the RBI has taken several steps in the past few months to augment the banking system liquidity. Since January 2025, the RBI has infused Rs9.5 trillion in additional liquidity in the system; resulting in a system liquidity surplus of over Rs 1.5 trillion.

 

Policy stance changed to ‘neutral’ from ‘accommodative’

The MPC shifted its stance from “accommodative” to “neutral,” signaling a cautious approach to further rate cuts and a potential pause in the rate-cutting cycle.

FY 26 growth forecast maintained at 6.5%, despite substantial monetary easing

The RBI maintained its real GDP growth forecast for FY26 at 6.5% yoy, the same as FY25. This highlights the challenges faced by the Indian economy presently, both from the global disturbances and domestic conditions.

The RBI sees CPI Inflation at 3.7% for FY26, down from previous forecast of 4% and below its tolerance band of 4 to 6%. This clearly reflects RBI’s optimism about price stability.

Despite substantial monetary easing, a favorable monsoon, stable fiscal balance, and strong government capital expenditure, the domestic growth is not expected to accelerate from the current pace.

The question thus arises, whether this boldness of the RBI is emanating from the confidence in the resilience of the economy and its commitment to stimulate economic growth; or it is a move to preempt a slide in the economic growth due to the anticipated global trade and geopolitics related developments.

I do not have any ready answer for this inquisition. However, I shall be closely monitoring some of the pointers from Governor Malhotra’s statement. For example:

1.    In his opening remark, the Governor highlighted the global challenges – “complex interconnections within the financial system, elevated debt levels and growing influence of frontier technologies are raising financial stability concerns. Amidst heightened volatility in capital flows and exchange rates, coupled with constrained policy space, central banks of emerging market economies have a tougher task to stabilize their economies against global spillovers”.

Though, the governor confidently stated, “In this global milieu, the Indian economy presents a picture of strength, stability, and opportunity”; the global spillovers need to be watched carefully.

2.    The governor exuded confidence that the actual inflation may undershoot the RBI target, and this is one of the core reasons for the bold policy move. He stated, “While food inflation outlook remains soft, core inflation is expected to remain benign with easing of international commodity prices in line with the anticipated global growth slowdown (emphasis supplied). The inflation outlook for the year is being revised downwards from the earlier forecast of 4.0 per cent to 3.7 per cent.

A quicker resolution of trade disputes and geopolitical conflicts might change this outlook, as the global growth might accelerate and commodity prices may rise. Also, an excessive monsoon may cause vegetable prices to rise faster than anticipated.

3.    The governor emphasized that “under the current circumstances, monetary policy is left with very limited space to support growth. Hence, the MPC also decided to change the stance from accommodative to neutral. From here onwards, the MPC will be carefully assessing the incoming data and the evolving outlook to chart out the future course of monetary policy in order to strike the right growth-inflation balance.”

Though many analysts are expecting more rate cuts later this year, the governor appears to be suggesting otherwise.

4.    The governor pointed out that “we are yet to see a perceptible transmission in the credit market segment, though we must keep in mind that it happens with some lag”.

We have witnessed that the banks have been reluctant to transmit the previous rate cuts to the borrowers. In the present case also, while the repo linked rates are getting adjusted, the action in case of MCLR based loans is limited. HDFC Bank for example has cut only by 10bps post the policy statement.

A failure to ensure full transmission may defeat the objective of RBI’s aggressive easing.

5.    The governor warned that “The stress witnessed earlier in retail segments like unsecured personal loans and credit card receivables portfolio has abated, while the stress in micro-finance segment is persisting”.

The stress in MFI is typical of elevated stress in the unorganized segment of the economy, especially rural and semi urban areas. This stress also has some relevance for private consumption.

6.    The governor also sought to end the growth vs inflation debate, stating that “there is no tussle between price stability and growth in the medium and long term. Price stability preserves purchasing power, imparts certainty to households and businesses in their savings and investment decisions and ensures congenial interest rate and financial conditions, all of which foster consumption, investment and overall activity. Moreover, it is crucial for equitable growth and shared prosperity because its absence is disproportionately burdensome on the poor”.

This is a new policy paradigm for the RBI, more aligned to the political narrative than the central banking. We will have to monitor how consistently the RBI follows this new tenet of monetary policy.

Conclusion

The 50bps rate cut demonstrates the RBI’s commitment to growth amid global headwinds. The CRR reduction is a significant liquidity booster for banks. This will augment credit availability for MSMEs and retail borrowers. The downward revision of the FY26 inflation forecast to 3.7% reflects confidence in price stability. Emphasis on recalibrating business models in high-risk segments (e.g., microfinance) and strengthening credit underwriting practices indicates proactive risk management.

The shift to a neutral stance suggests the RBI believes monetary policy has limited room to support growth further, as noted in the policy statement. This could constrain future responses if economic conditions deteriorate.

Further, the RBI has limited control over supply-side inflation, driven by commodity prices and fiscal policy. If supply constraints re-emerge, the RBI’s ability to maintain inflation within the 4% target could be tested, potentially forcing a policy reversal.

Besides, rapid rate cuts and liquidity injections could lead to overheating in certain sectors, such as real estate or consumer credit, if not monitored closely.

Deposit rates that have already been declining may decline further, impacting the savers, especially the pensioners, adversely. However, the pace of transmission of rate cuts lender is still not congruent with the policy objectives.

Also read

The state of the Indian economy

The Indian economy – glass half full

The Indian economy – glass half empty