RBI Jul-25 Forward Survey paints a benign inflation picture

14 Aug 2025 , 10:49 AM

The latest RBI forward looking survey for July 2025, published in August 2025, is in stark contrast to the cautious May 2025 survey. The higher growth optimism is largely built on the expectations of sharply lower inflation.

• URBAN AND RURAL CONSUMER CONFIDENCE SURVEYS SHOW OPTIMISM

The urban consumer confidence index for the current period and the expectations for the year ahead period have improved significantly. With inflation falling sharply, and food inflation in negative territory; the inflation expectations are down sharply. This has led to greater optimism that urban India will see more of consumer driven growth in the next one year. Most urban households are also confident of greater spending power sustaining.

The rural consumer confidence survey has also painted an optimistic picture of inflation and growth. The current expectations and the expectations for the one-year ahead period are looking more optimistic for rural India. There has been a 50 bps fall in current inflation expectations in rural India and that has triggered hopes that households will have greater purchasing power over the next one year. It is largely optimism led by lower inflation.

• HOUSEHOLD INFLATION EXPECTATIONS TRENDING LOWER

The inflation survey of households looks at current inflation with respect to 3-months ahead, and the 1-year ahead expectations. Here is what we could decipher.

• Compared to the May survey, the July survey shows household perception of current inflation down 50 bps from 7.7% to 7.2%. Similarly, expectations of 3-month ahead inflation is down 60 bps from 8.9% to 8.3% while the expectations of 1-year ahead inflation is down 50 bps from 9.5% to 9.0%.
• Expectations of inflation across food products and non-food items moderated in the inflation basket. Even the number of respondents expecting lower current and future inflation has gone up sharply compared to the previous survey.

Apart from the higher degree of confidence in prices falling, the lower inflation expectations are common across rural India  and urban India.

• Q4FY25 MANUFACTURING SURVEY AND Q1FY26 INDUSTRIAL OUTLOOK

According to the OBICUS Manufacturing Survey for Q4FY25, the capacity utilization has gone up from 75.5% to 77.7%. In the fourth quarter, most manufacturers reported higher growth in new orders on a sequential basis, while it was flat on a yoy basis. Ratio of raw material to sales fell in the quarter showing greater churn into output amidst higher demand.

The RBI forward looking survey also covers an initial assessment of Q1FY26 and expectations for Q2FY26. For Q1, manufacturers reported moderation in seasonal demand conditions. Input costs moderated, but business sentiments also moderated amidst macro risks. In terms of Q2FY26 expectations, manufacturers expect improved demand conditions but also expect elevated input cost pressures. However, selling margins are expected to improve.

• WHAT THE PROFESSIONAL FORECASTERS SAID IN JULY 2025

RBI also surveys professional forecasters on GDP growth, inflation, and current account.

• Professional forecasters are pegging 10 bps better growth rate for FY26 and FY27 at 6.4% and 6.7% respectively. For FY26, agricultural output is expected to be marginally lower while manufacturing and services are likely to be flat. Real GDP growth is likely to benefit largely from lower inflation in the coming year.
• As per the professional forecasts, CPI inflation is pegged 70 bps lower than May survey at 3.1% for FY26 but 20 bps higher than May Survey at 4.4% for FY27. Inflation is expected to rise sharply from the fourth quarter onwards as supply chain constraints and higher tariffs are likely to translate into imported inflation for India.
• On the external trade front, merchandise exports are expected to grow at 1.2% in FY26 (30 bps lower than May estimates) and 4.9% in FY27. On the other hand, merchandise imports are targeted to grow at 2.5% (160 bps lower) in FY26 and 6.0% (20 bps higher) respectively. The current account deficit (CAD) is pegged at 0.8% of GDP in FY26, but move up to 0.9% in FY27.

Overall, the survey expectations show a tinge of optimism, although it must be said that this optimism is largely driven by lower inflation expectations.