Key Points

The central bank report highlighted the benign domestic price situation, with headline inflation staying below the tolerance level (4 per cent) for the fourth consecutive month in May.

In its State of the Economy segment, the RBI said financial conditions remained conducive to facilitate an efficient transmission of rate cuts to the credit market.

The RBI recently reduced the repo rate by 50 basis points to boost economic growth.

Meanwhile, the central bank report said the optimism generated by the US administration's temporary tariff freeze and trade deals has kept financial market sentiments buoyant in May and early June 2025.

However, following the Iran-Israel conflict, heightened uncertainty and volatility have once again gripped financial markets.

The June OECD and World Bank reports reaffirmed the possibility of a marked deterioration in medium-term global economic prospects amidst rising trade barriers and restrictions.

While food prices softened, non-food commodity prices have shown volatile movements, accentuated by geopolitical tensions.

Crude oil prices have surged since June 13 due to renewed tensions in the Middle East, while gold prices have also rallied due to safe-haven demand.

"Amidst heightened concerns on their domestic growth outlook, several central banks utilised the headroom provided by lower inflation prints to further reduce policy rates," RBI said.

The provisional estimates released in May have reaffirmed growth to be 6.5 per cent in 2024-25, with a significant sequential pickup in the fourth quarter.

"Various high-frequency indicators for May point to signs of resilient economic activity across the industrial and services sector. In fact, among the countries surveyed for the Purchasing Managers' Index (PMI), overall expansion in activity was the highest in India, with the expansion in new export orders witnessed in May being an outlier, amidst contraction seen in other major economies," the RBI report read.

Capacity utilisation by manufacturing firms remained above its long-period average. High-frequency indicators of aggregate demand for May also suggested a pick-up in rural demand, especially given the strong performance of the agricultural sector.

The agriculture sector showed a broad-based increase in production across most major crops during 2024-25.

According to the RBI, forward-looking surveys of consumer sentiments show stable consumer confidence for the current period and improved optimism about the future.

"All of these indicate considerable resilience of the Indian economy, notwithstanding the global economic, trade, and geopolitical uncertainties," the RBI said.

- ANI