Kotak report warns of growth slowdown as erratic monsoon threatens inflation outlook
India's economy may face slower momentum in the coming months as weak monsoon rains risk fuelling food inflation, Kotak Mahindra Bank said in its economy tracker report.
While the economy grew 7.8 per cent year-on-year in the first quarter of FY2025-26, Kotak said sustaining this pace could prove difficult with uneven rainfall raising risks of higher food prices and tighter household budgets. The report pointed out that rural demand, already under strain, could weaken further if agricultural output falters.
"Erratic monsoon distribution has emerged as the biggest near-term risk to growth and inflation," the report said. Food inflation has remained elevated in recent months despite easing core inflation, and Kotak expects the Reserve Bank of India (RBI) to stay cautious on policy easing until price pressures subside.
India's consumer price index (CPI) inflation eased marginally to 4.9 per cent in July from 5.1 per cent in June but remained above the RBI's medium-term target of 4 per cent. The report noted that food inflation, particularly in vegetables and pulses, continues to drive volatility.
On the external front, India's merchandise exports in July fell 2.6 per cent year-on-year, while imports rose 5.4 per cent, widening the trade deficit to USD 25.1 billion. A slowdown in global demand and lower shipments of engineering goods and petroleum products weighed on exports, Kotak said. Services exports, however, remained resilient, providing some cushion to the current account balance.
The report flagged fiscal risks as well, noting that the central government's fiscal deficit for April-July stood at 36 per cent of the full-year target, compared with 33 per cent in the same period last year. While buoyant tax collections have supported revenue, higher subsidy spending and capital expenditure commitments could strain the deficit later in the year.
Industrial activity showed mixed signals. The Index of Industrial Production grew 5.2 per cent in June, driven by manufacturing and electricity output, while core sector growth slowed to 3.1 per cent in July, reflecting weaker performance in steel, cement and coal. Purchasing Managers' Index data indicated continued strength in services but moderation in manufacturing expansion.
Kotak said private investment trends remain positive, supported by strong corporate balance sheets and government-led infrastructure spending, but consumer sentiment may turn cautious if inflationary pressures persist. Credit growth has been robust at over 14 per cent year-on-year, though deposit mobilisation continues to lag, keeping banking system liquidity tight.
The report concluded that India's near-term growth outlook hinges on the monsoon trajectory and its impact on inflation. "A poor harvest would not only push food prices higher but also dampen rural consumption, which is critical for sustaining broad-based recovery," it said.
Kotak expects GDP growth for FY2025-26 to moderate to around 6.7 per cent from 7.6 per cent in the previous year, with inflation averaging 4.8 per cent. The RBI is likely to maintain its pause on rate cuts until there is clearer evidence of easing food inflation, the bank said.