Indian Consumption – A Gradual Revival in the Making?

What’s the Point?

• The Reserve Bank of India (RBI) Bulletin for June 2025 stated that on the demand side, private consumption, remains healthy, with a gradual rise in discretionary spending. While rural demand has remained steady, urban demand, which had remained muted for the past few quarters, is gradually witnessing an improvement.
• This is a positive development because RBI in the same Bulletin mentioned, “growth remains lower than our aspirations amidst challenging global environment and heightened uncertainty.” Hence, it believes that it is “imperative to continue to stimulate domestic private consumption and investment through policy levers to step up the growth momentum.”
• Gross Domestic Product (GDP) = Consumption + Investments + Government Expenditure + Exports – Imports. As per the Provisional Estimates of Annual GDP for FY25 and its Expenditure Components published by Ministry of Statistics and Program Implementation (MoSPI), Private Final Consumption Expenditure, the mainstay of aggregate demand, accounts for 61.4% of India’s GDP. Hence, an improvement in the indicators driving consumption will help support a meaningful boost to India’s economic growth.

India’s High Frequency Indicators – Setting Numbers into Perspective

6 out 9 India’s key high frequency indicators – registrations of 2-Wheelers, PV and Tractors, Goods and Services Tax (GST) collections, E-Way Bills generated – have sequentially improved in Q1FY26 relative to Q4FY25. The uptick in economic activities was also visible in the in the Purchasing Managers’ Index (PMI) readings, with Services PMI recording a 10-month high led by international sales.

Source: www.gstn.org.in , www.icegate.gov.in (MoF), Centre for Monitoring Indian Economy (CMIE), Press Information Bureau (PIB), RBI, www.vaahan.parivahan.gov.in (VP). ^Number >50 reflects expansions and number <50 reflects contraction compared to previous month. @Figures are preliminary data and are subject to revision. UPI: Unified Payments Interface, #IMPS: Immediate Payment Service

Measures taken by RBI and the Government to boost Consumption in India

1) Income Tax Relief

In the Union Budget FY2025-26, the Government reduced the tax liability for individual income taxpayers, with no liability for those earning up to ₹12 lakh (₹12.75 lakh in case of salaried employees due to standard deduction of ₹75,000). While these changes to tax amount to more than ₹1 lakh crore worth of tax foregone, it was carried out with the aim to create a significant consumption boost in the economy.

2) Cuts in Interest Rates and Cash Reserve Ratio

The RBI has already taken the following measures to boost consumption:

• An initial 50 bps cut in Cash Reserve Ratio from 4.5% to 4% in the December 2024 Monetary Policy Committee (MPC) Review with the expectation of infusing liquidity to the tune of ~₹1.16 lakh crore into the system, followed by an additional 100 bps cut to 3.0% in June 2025 MPC Review (4 equal tranches of 25 bps starting from the fortnights of September 6, October 4, November 1 and November 29, 2025)
• 3 interest rate cuts bringing the Repo Rate from its peak level of 6.5% to 5.5% in its last 3 MPC Reviews
• Multiple Open Market Operations and USD/INR swaps to supply higher liquidity into the system

3) Higher Welfare Spends

The State Governments of large states including Maharashtra, Madhya Pradesh, Karnataka, Telangana, Andhra Pradesh have announced welfare schemes >₹3 lakh crore in the last 1 year to increase consumption, income generating activity in low-income households and favourably impact standard of living by reducing inequality. The Economic Survey for FY25 highlighted that Government welfare schemes such as free or subsidized food grains, subsidized cooking fuel, insurance cover, Direct Benefit Transfers under various schemes are lifting household incomes. These fiscal transfers help to provide additional resources to the financially deprived sections and, thus, favourably impact people's standard of living.

4) Lower Inflation

Post-pandemic times saw a rise in India’s inflation levels, which was preventing consumption from picking up at one point of time. But the RBI’s measures like increasing Repo Rate helped in bringing inflation under control. As of June 2025, India’s Consumer Price Index (CPI) stands 2.1% – the lowest level since January 2019. A lower inflation print aids spending potential, helping consumption to pick up.

5) Prospects of Above-Average Monsoon

As per the Long Range Forecasts issued in mid-April 2025 by the IMD, the Southwest Monsoon seasonal (June to September) rainfall over the country as a whole during 2025 is most likely to be above normal – greater than 104% of the Long Period Average. This bodes well for consumption as it boosts rural incomes and lowers inflation expectations.

Conclusion

In 2021, the RBI conducted a study on Monetary Policy Transmission (MPT) – the process through which policy action of the central bank is transmitted to meet the ultimate objectives of inflation and growth. In general, MPT is considered to be a two-stage process, with stage 1 being policy shock impacting different segments of the financial markets, and stage 2 being its transmission to the real economy. RBI’s study revealed that the effect of transmission in GDP growth occurs with a lag of two to three quarters. Inflation, on the other hand, reacts with a lag of three to four quarters, with the impact persisting for eight to twelve quarters. Hence, while the RBI has taken various monetary measures to boost consumption, its transmission is yet to take place in a meaningful manner.

Keeping this in mind, investors could consider investing in consumption theme through HDFC Non-Cyclical Consumer Fund. This Fund aims to invest in companies across market caps, which are leaders and/or are gaining market share due to superior execution, scale, better adoption of technology etc. While doing so, the Fund also focuses on companies likely to witness growth, turnaround in profitability, and have re-rating potential.

Sources: RBI, MoSPI, PIB, GST Network, VP, MoF, CMIE, IMD, and other publicly available information

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