India’s economic activity remains resilient in Q1; July indicators point to continued momentum: SBICAPS

India’s economic activity remained resilient in the first quarter (Q1) of FY27, with high-frequency indicators suggesting that the momentum continued into July, according to a report by SBICAPS.

Industrial activity remained strong during the quarter, with railway freight volumes, diesel consumption, and automobile retail sales pointing to sustained momentum in July. However, SBICAPS cautioned that the Industrial Composite Indicator (ICI) appears stronger than before following the inclusion of iron ore, whose output has performed well in recent months.

Services activity also remained resilient, although the Purchasing Managers’ Index (PMI) indicated a moderation in the pace of expansion. Petrol consumption surged in July, supported by increased travel amid an erratic monsoon and a favourable base from July 2025. Air travel, however, remained under pressure from elevated aviation turbine fuel (ATF) prices, while a decline in LPG consumption suggested that supply chains had yet to fully normalise.

Gross GST revenue growth has recovered over the past two months following six months of subdued growth, which was affected by GST rate rationalisation and the removal of cess. However, gross GST collections increased a moderate 3% year-on-year during the first four months of FY27.

Inflationary pressures remain elevated

Retail inflation rose to 4.38% year-on-year in June, while food inflation, measured by the Consumer Food Price Index (CFPI), stood at 5.32%.

Inflationary pressures were particularly pronounced in precious metals and select food items, including tomatoes. Prices of personal care products also surged 16.9%. Rural inflation outpaced urban inflation, while southern states generally recorded higher inflation.

Wholesale price inflation (WPI) was driven largely by fuel and power, whose prices increased 27.4% in June amid higher oil prices. Manufactured product prices rose 7.5%, led by chemicals, basic metals and textiles. WPI inflation stood at 9.4% year-on-year in Q1FY27, while output producer price inflation was 9.6% in June, partly reflecting a sharp increase in prices of other metallic minerals.

Power demand stays strong, coal inventories decline

Electricity supply increased 11.1% year-on-year, with demand particularly strong in northern and southern India as intense summer temperatures boosted the use of cooling appliances.

Despite a significant increase in coal supplies, inventories at power stations continued to decline. Coal’s share in total power generation fell to a one-year low, supported by strong solar generation.

Meanwhile, draft regulations proposed by the Central Electricity Regulatory Commission (CERC) suggest that transmission charge waivers could be extended to renewable energy projects delayed because of unavailable transmission connectivity. The proposed relief would apply to projects that sign power purchase agreements of at least seven years by December 31, 2026.

Bank credit growth hits multi-year high

Non-food bank credit growth accelerated to a multi-year high, supported by strong lending to industry and micro, small and medium enterprises (MSMEs). Credit to large industries surged 16.6%.

The strongest credit offtake was recorded in petroleum, coal products and nuclear fuels, engineering, and gems and jewellery. Services credit growth stood at 21.4%, driven by strong demand from public financial institutions.

The Reserve Bank of India (RBI) issued final amendments to its directions on interest rates on deposits, allowing banks to offer differential rates on bulk deposits. The condition relating to run-off rates for calculating the Liquidity Coverage Ratio has also been retained. The revised rules will take effect from October 1, 2026.

With deposit mobilisation becoming more challenging, the weighted average domestic term deposit rate for fresh deposits rose 16 basis points month-on-month in June. The one-year marginal cost of funds-based lending rate (MCLR) also increased 10 basis points in July as banks sought to protect their net interest margins.

RBI keeps rates unchanged

The Monetary Policy Committee unanimously maintained the status quo on policy rates while retaining flexibility for future action. The stance remained neutral.

SBICAPS said the next rate action could eventually be a hike, but the RBI Governor’s statement appeared to push back the timeline for such a move. The probability of a rate hike in FY27 therefore remains low, with the central bank appearing more tolerant of inflation staying above its target.

RBI Governor Sanjay Malhotra also indicated that liquidity conditions could become less accommodative after September.

Global economy shows mixed signals

Global markets remained volatile amid shifting developments in the West Asia conflict. Brent crude prices rose month-on-month as the anticipated peace process faltered, while major agencies expect supply constraints to persist through 2026.

The Indian rupee appreciated against the US dollar, although gains were limited as the dollar index strengthened 1.1% month-on-month. The Japanese yen continued to weaken sharply, prompting coordinated intervention by the US and Japan. Concerns over a potential AI bubble and currency depreciation also triggered periodic sell-offs in Asian markets, including Japan’s Nikkei and South Korea’s Kospi.

Global economic activity, however, remained resilient. The Global Composite PMI rose to a five-month high of 52.6, with services and manufacturing recording readings of 52.5 and 52.7, respectively. The US services PMI surged to 54.6 in July from 51.2 in June, lifting the US Composite PMI to 54.5, its highest level since October 2025. Global manufacturing PMI also rose to 52.1.