Slow credit growth and weak private investment may restrict acceleration in India’s economic momentum, the finance ministry said on Monday. It also warned that continued uncertainty on the US tariff front might weigh on the country’s trade performance in the coming quarters.
As of June 27, the annual credit growth among the scheduled commercial banks was 10.4% compared with 13.9% recorded a year ago.
India’s merchandise exports witnessed a modest fall on year at $ 35.14 billion in June. Goods shipments have been either flat or negative in most of the recent months, except April 2025 and October 2024. The pick-up in April was largely due to the rush among the exporting community to execute orders, in order to beat the 26% reciprocal tariff by the US. That extra impost has since been put in abeyance, while a 10% baseline tariff has taken effect, besides the earlier MFN rates in exports to the US.
Muted lending, stronger bond market
“Despite monetary easing and a strong bank balance sheet, credit growth has slowed, reflecting cautious borrower sentiment and possibly risk-averse lender behaviour,” the ministry said in its monthly review report about the economy. A growing preference for bond markets, particularly commercial papers among corporates due to lower borrowing costs, may also explain the shift, it said.
“Piggybacking on initiatives like the Employment Linked Incentive (ELI) scheme, it is time for corporates to set the ball in motion,” it said.
The ministry, however, noted that robust domestic demand and services activity helped the economy sustain its growth momentum in the first quarter of FY26.
Export headwinds, policy risks remain
Aided by robust domestic demand, fiscal prudence and monetary policy support, India appears poised to continue as one of the fastest-growing major economies, with various forecasters, including S&P, ICRA, and the RBI’s Survey of Professional Forecasters, projecting GDP growth rates for FY26 in the range of 6.2% and 6.5%, the ministry noted.
While geopolitical tensions have not elevated further, the global slowdown, particularly in the US (which shrank by 0.5% in Q12025), could dampen further demand for Indian exports, the finance ministry economists said.
India is understood to have hardened its position in bilateral trade agreement (BTA) talks recently, while the US has threatened to hit countries like India and China with secondary sanctions for buying oil from Russia. While the discussions were focused on the first tranche of a BTA for which the target is the fall of the year, the progress achieved in the negotiations so far could still be packaged as an interim agreement, sources say.
Such a deal is crucial for reducing the extent of reciprocal tariffs that Indian exports could face in the US after August 1. If the interim deal doesn’t materialise, India could see higher tariffs in shipments to the US for the next few weeks before the first trache of BTA is agreed on, analysts feel.
According to the finance ministry, high-frequency indicators reflected broad-based strength, registering strong year-on-year growth. While the manufacturing and construction sectors continued to expand, the services sector anchored the overall economic growth in Q1FY26.
Further, given the deflationary trend in the wholesale price index, one has to observe economic momentum in nominal quantities, it said. Lower WPI inflation of manufactured products is not positive for the industry, as it shows that pricing power has come down.
