The Indian economy's scorecard weakened in June as consumer demand moderated and inflation climbed above the Reserve Bank of India's (RBI) 4% target.
After a strong start to the first quarter, spending on cars, tractors and air travel lost momentum in June, while food prices accelerated. The moderation was visible across both urban and rural consumption indicators, making it important to watch whether the slowdown proves temporary or persists in the months ahead.
Production activity, meanwhile, remained firm. Core-sector growth improved and labour-intensive exports returned to double-digit growth, suggesting the softer consumption reading has not yet translated into weaker production or external demand.
Data from Mint’s macroeconomic tracker (MMT) shows that eight of the 16 high-frequency indicators fell below their one-year average range in June, up from six in May. The reading was also weaker than in February, before the West Asia war began, when five indicators were below their one-year average range.
Launched in October 2018, Mint’s macro tracker provides a monthly comprehensive report on the state of the economy, based on trends in 16 high-frequency indicators. For each indicator, the value in each month is assigned a colour-coding to denote where it lies relative to the one-year average range.
Uneven signals
The June numbers point to a softer end to the quarter for consumption, after a strong start, with the moderation extending from goods to services. Growth in passenger car and van sales—a key metric of urban discretionary spending—slowed to 15.3% from 26.3% in May and 30.7% in April.
While tractor sales, which reflect farm activity and rural sentiment, rose 11.9% compared with 19.6% in May and 26.8% in April. Adding to the moderation in discretionary services spending, domestic air passenger traffic contracted 1% in June after expanding 9.5% in May.
From the production side, the performance of indicators held up stronger.
Core-sector growth accelerated to 5% in June from 3.2% in May, led by a better performance across infrastructure-related industries, while rail freight growth rose to 4% from 1.3%. The composite PMI eased from 59.3 to 57.1, but remained comfortably above 50, indicating continued expansion in private-sector activity. This means the slowdown in demand has not yet translated into a comparable loss of momentum in production.
The recovery in labour-intensive sector exports was another positive. Exports from the eight labour-intensive sectors tracked by Mint grew 12.1% in June, compared with a 1.8% contraction in May. The turnaround is relevant for domestic activity because these sectors tend to be more labour-intensive than capital-heavy export industries. A sustained recovery in orders could support factory output and employment, but June is too early to tell whether the improvement will last.
The external balance remained a weak spot despite the export recovery. The trade deficit widened to 27.4% of total trade in June from 23.8% in May, while import cover fell to 9.7 months from 10 months. The rupee appreciated 0.6% against the dollar in June, reversing the three consecutive months of decline. However, the recovery was short-lived as the currency depreciated 0.96% against the dollar till 28 July.
Inflation dynamics
The inflation outlook now appears less worrying than it did when the West Asia war began, but June brought a fresh test.
CPI inflation rose to 4.4% in June from 3.9% in May, moving above the RBI’s 4% target, with food prices accounting for much of the increase. Food inflation rose to 5.3% from 4.8%, even as the risk of a major crop shortfall has reduced with the improvement in kharif sowing.
As of 10 July, paddy acreage was 8.6% below last year and pulses were down 23.3%. By 24 July, the shortfall in total kharif acreage had narrowed to 4.7%, from 16% on 10 July. The gap in paddy had narrowed to 2.6%, while that in pulses had come down to 7.5%. Better sowing reduces the risk of a sharp food-supply shock, although the final outcome will depend on rainfall through August and crop yields.
If the improved acreage translates into a good harvest, supply should become more comfortable and food-price pressures could ease. A poor distribution of rainfall, however, could still affect yields even with better acreage. For now, the data point to a lower risk of a major supply disruption, rather than an end to food inflation.
There are signs of broader price pressure too. Core CPI inflation rose to 4.1% from 3.7% in May, while wholesale inflation increased to 9.87% in June from 9.68% the previous month.. Wholesale food inflation reached a 17-month high of 5.5%.
Crude is the other major variable, but the shock feared at the start of the West Asia war has so far been limited. Oil prices have remained around $85 a barrel, preventing a sustained surge in fuel and transport costs. A renewed escalation in the war could quickly change that.
“The rise in crude oil prices will rapidly transmit to the WPI. If it sustains and retail selling prices for petrol and diesel are increased, then the CPI will rise as well,” said Aditi Nayar, chief economist at ICRA. ICRA expects CPI inflation to average 5% in FY27 and sees a possibility of an RBI rate hike in the third quarter.
According to India Ratings, inflation is projected to rise to 4.9% in July, although that would remain below the RBI’s 6% upper tolerance limit. It expects food prices to remain an upward pressure point, with weather conditions continuing to influence the outlook.
The inflation risk, therefore, has become more manageable but not benign. The food-price threat depends increasingly on how the kharif crop performs, while crude remains a separate external risk. A good harvest and contained oil prices would allow the June rise in inflation to remain relatively limited; a poor crop or another oil shock could make the recent increase more persistent.