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Key Points

HSBC's latest analysis predicts that India's low inflation rate, around 2.5% for the next six months, will significantly enhance the purchasing power of households while reducing corporates' input costs. This situation is likely to support India's fiscal finances, aided by a higher-than-budgeted RBI dividend and potential oil excise tax adjustments. Despite some fiscal pressures from lower-than-expected GDP growth and increased defense spending, the government has strategies to manage these challenges. Notably, informal sector consumption is on the rise, buoyed by state capital expenditure and an improved agricultural season.

Key Points: HSBC Sees India's Low Inflation Boosting Economy and Finances

  • Low 2.5% inflation boosts purchasing power
  • Supports fiscal finances via higher RBI dividend
  • Government may leverage global oil price fall
  • Informal sector sees consumption rise
2 min read

Low inflation to boost purchasing power, bolster fiscal finances in India: HSBC

HSBC expects India's low inflation to enhance purchasing power and support fiscal stability, with a positive economic outlook.

"We estimate...fiscal deficit target will be met with extra funds for growth support. - HSBC Report"

New Delhi, May 26

Low inflation for the rest of the year will result in improving real purchasing power of households and lowering input costs for corporates in India, an HSBC Research report said on Monday, adding that a less obvious, but equally important benefit, could be via fiscal finances.

The rest of the year will likely get support from lower inflation of about 2.5 per cent for the next six months.

With public granaries stocked up and monsoon rains likely to be favourable, food inflation is set to remain low. Core inflation as well will likely remain range-bound, led by weaker commodity prices, softer growth, a stronger rupee (against the US dollar), and imported disinflation from China, said the report, while updating its 100 indicators database for the country.

These indicators map various sectors, and gives a thorough and sequential picture of growth.

There are some pressures on the FY26 fiscal deficit target from lower-than-budgeted nominal GDP growth and direct tax buoyancy, and higher defence spending.

"However, there are offsetting factors as well, specifically a higher-than-budgeted RBI dividend (Rs 2.7 trillion). Most importantly, however, the option for the government to appropriate some of the fall in global oil prices by raising oil excise tax," said the HSBC report.

Given inflation is already low, "we estimate that if the government usurps half of the oil 'bounty' instead of lowering pump prices, it will not just meet the fiscal deficit target but also have some extra funds available for growth support," it added.

The March quarter (1Q25) was a notch better than before, with 66 per cent of the indicators growing positively (versus 64 per cent and 61 per cent in the previous two quarters).

Informal sector consumption led the charge, benefitting from a rise in state capex (in March), a good winter crop, higher real rural wages, and improved rural terms of trade.

On the other hand, urban consumption indicators, such as consumer durables production and imports, were softer.

"We have got a third of the activity data for April and 64 per cent of the indicators are growing positively. Informal sector consumption seems to have picked up further in the month (proxied by domestic non-cess GST)," the report mentioned.

- IANS

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Reader Comments

R
Rahul K.
Good news for common people! Lower inflation means my salary will stretch further. But government should ensure these benefits reach middle class families through reduced prices, not just in reports. The RBI dividend is a welcome surprise though 👍
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Priya M.
Rural India finally getting some relief after tough years! Better crops + higher wages + lower inflation = perfect combo. Hope this translates to more spending power in villages. Our farmers deserve this break after backbreaking work.
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Amit S.
Why is urban consumption still lagging? As someone running a small electronics shop in Bangalore, I'm not seeing this 'recovery' yet. GST collections might be up but footfall remains low. Government needs to focus on creating more urban jobs.
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Neha T.
The part about government keeping oil taxes instead of reducing prices worries me. Petrol/diesel prices affect everything from veggies to transport. If global prices are down, pass some benefit to consumers na! 🛵
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Sanjay P.
Strong rupee + low inflation = best time for Make in India! Foreign companies should invest more now when input costs are low. Hope states utilize this opportunity to attract manufacturing units beyond just metros.
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Kavita R.
While the report is optimistic, we've seen how unexpected weather events can disrupt food prices overnight. Government should build bigger buffers and modernize supply chains while inflation is low. Prevention better than cure!

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