Weak monsoon may cloud growth-inflation dynamics: RBI's June Bulletin

Recent policy measures likely to push up sovereign debt demand

A rain-deficient monsoon — if it materialises as forecast by the India Meteorological Department (IMD) — could weigh on the country’s growth-inflation dynamics, according to the article on the State of the Economy, written by Reserve Bank of India (RBI) officials, in the central bank’s June bulletin. 

The IMD has forecast below-normal southwest monsoon rainfall this year. The latest data showed the rainfall deficit widening to 42.2 per cent of the long-period average as of June 21 from 28.4 per cent on June 14. 

“An adverse south-west monsoon, if materialised, may weigh on the domestic growth-inflation outlook,” said the report, authored by RBI staffers under the guidance of Deputy Governor Poonam Gupta. The views expressed in the bulletin article are those of the authors and do not represent the views of the RBI. 

 

The central bank has projected real GDP growth for 2026-27 at 6.6 per cent, significantly lower than the 7.7 per cent growth recorded in 2025-26, according to provisional estimates. Consumer price index (CPI) inflation for 2026-27 is projected at 5.1 per cent. 

On the impact of the West Asia conflict, the report said the Indian economy entered the period of turbulence with stronger fundamentals compared with several other economies, allowing it to better absorb external shocks. “India maintained a consistently high growth, anchored inflation expectations, sustained fiscal consolidation, manageable current account balance and foreign exchange buffers over the previous few years, which adds to its strength vis-à-vis similar other events in the past,” it said. 

The report noted that despite a challenging global environment, the Indian economy expanded 7.8 per cent in the fourth quarter of 2025-26, supported by private consumption and fixed investment. 

It added that high-frequency indicators during the first two months of 2026-27 pointed to continued economic momentum, with domestic demand remaining resilient, particularly on the back of urban consumption. 

On inflation, the report said price pressures remained contained despite an uptick in May. CPI inflation rose to 3.9 per cent in May 2026 from 3.5 per cent in the previous month, driven by broad-based increases across food, fuel and core components. “The rise in transport fuel prices reflects the latest adjustment of retail prices by oil marketing companies,” it said. 

The report noted that the broad-based increase in food prices appeared to have continued into June, based on daily price data available up to June 18. 

India’s external sector, meanwhile, continued to show resilience, supported by a contained current account deficit and adequate foreign exchange reserve buffers. 

Among capital flows, foreign direct investment (FDI) inflows gained momentum, while foreign portfolio investment (FPI) recorded net outflows since March 2026. 

The report said recent policy measures, including the expansion of the fully accessible route (FAR) to longer-tenor government securities and tax exemptions for foreign investors in government securities, are expected to boost demand for Indian sovereign debt and support capital inflows. 

On banking system liquidity, the report observed that surplus liquidity conditions moderated in May amid a continued rise in currency in circulation, the RBI’s foreign exchange operations and an increase in government cash balances. Liquidity conditions are expected to ease going ahead, as the drawdown of government cash balances following the RBI’s surplus transfer to the government is likely to augment system liquidity.