RBI Bulletin: September Shows Demand Pickup in India, US Tariffs No Big Worry Thanks to GST Reforms and Strong Fundamentals

Why in News

The Reserve Bank of India released its October 2025 bulletin on October 20, highlighting positive signs in domestic demand for September based on high-frequency data like vehicle sales and GST e-way bills. It also downplayed the impact of high US tariffs on India's growth, emphasizing the role of recent GST rate cuts in boosting consumption and offsetting external pressures, amid ongoing global trade tensions.

Key Points

1. Domestic demand improved in September, with rural areas showing strength from a good monsoon and urban demand reviving through higher vehicle sales.
2. High-frequency indicators like GST e-way bill generation hit a record high, driven by festive season stocking and GST rate cuts effective from September 22.
3. Vehicle sales data from SIAM showed two-wheeler sales up 6.7% year-on-year, three-wheeler sales up 5.5%, and passenger vehicles up 4.4% in September.
4. Tractor sales rose 42.9% as per Tractor and Mechanization Association, reflecting robust agricultural activity.
5. Digital payments saw the sharpest month-on-month uptick in FY26, linked to festive demand boosted by GST reductions and e-commerce offers.
6. US tariffs of 50% on Indian exports are seen as a supply-side shock mainly affecting the US, with limited impact on India due to domestic-driven growth.
7. India's merchandise exports to the US contracted in September, but overall exports grew 6.7% to $36.38 billion, with non-US markets up 10.9%.
8. Trade deficit widened to $32.15 billion in September, a 13-month high, driven by oil and electronics imports.
9. RBI forecasts FY26 GDP growth at 6.8%, with Q2 (July-September) at 7%, supported by low inflation at 1.54% in September.
10. Most Indian pharma exports to the US (generics) are shielded from tariffs, as they apply mainly to branded products.

Explained

What does the RBI's October 2025 bulletin say about India's economic performance in September?

Overview of Demand Improvement: The bulletin points to better domestic demand, with rural areas benefiting from a strong monsoon that supported farming, leading to higher sales of items like two-wheelers and tractors; urban demand picked up as people bought more passenger vehicles and used digital payments more during the festive season.

Role of High-Frequency Data: These are quick indicators like GST e-way bills (which track goods movement) reaching a record high, showing businesses stocked up for festivals; this data helps gauge economic activity faster than quarterly GDP numbers.

What is the State of the Economy article in the RBI bulletin, and why is it important?

Background on RBI Bulletin: The RBI releases a monthly bulletin with articles on economic trends; the "State of the Economy" piece is written by RBI staff (not official views) and analyzes recent data to give insights into growth, inflation, and external factors.

Significance for Policy and Economy: It helps policymakers and businesses understand short-term changes; for example, it highlights how domestic factors like GST cuts can counter global issues, providing a balanced view for India's economy, which relies more on internal consumption (about 60% of GDP) than exports.

What are GST rate cuts, and how do they help the economy according to the RBI?

Basics of GST: Goods and Services Tax is a unified tax on most goods and services in India, introduced in 2017 to simplify taxation; rates vary from 0% to 28%, and cuts mean lower taxes on items, making them cheaper.

Recent Cuts and Their Impact: Effective September 22, 2025, cuts on daily-use items like electronics and consumer goods reduced prices, boosting affordability and consumption; RBI says this will increase demand, support production, and offset export losses from US tariffs by stimulating domestic markets.

What is the impact of US tariffs on India, and why does RBI say it's not a major concern?

Understanding Tariffs: Tariffs are taxes on imports; the US imposed 25% standard duties from August 7, 2025, plus 25% more from August 27 for India's Russian oil purchases, totaling 50% on many goods like textiles, gems, and engineering products.

RBI's Analysis: Exports to the US (India's largest market) fell 20.3% in September, but overall growth came from other markets; since India's economy is 60-70% driven by domestic demand, tariffs affect only net external demand (about 1-2% of GDP impact), and sectors like generics pharma are mostly exempt.

Broader Trade Context: India's FY26 H1 trade deficit rose due to oil imports, but resilience comes from diversifying exports to non-US regions, with total exports up 3% in April-September.

What are the key economic fundamentals supporting India's resilience?

Macroeconomic Fundamentals: These are basic strengths like low inflation (1.54% in September, a 99-month low), strong bank and corporate balance sheets (low bad loans, high profits), adequate forex reserves (over $600 billion), and credible policies (fiscal deficit targets, monetary stability).

Growth Projections: RBI raised FY26 GDP forecast to 6.8% after 7.8% in Q1; this shows confidence despite global slowdowns, with domestic factors like monsoon and GST driving momentum.

What does the infographic in the Indian Express report show, and what is its analysis?

Description of Infographic: It features the RBI logo with text on "High-Frequency Data for Sept 'Robust'", highlighting GST e-way bill generation at a record high due to festive stocking and government GST cuts aiding demand.

Analysis: The graphic visually emphasizes positive indicators like vehicle sales growth (e.g., tractors up 42.9%) and digital payments uptick, showing a shift from earlier concerns over weak demand; it underscores how these metrics signal economic recovery, but warns of potential inflation rise in H2 FY26 due to base effects and increased spending.

How does this bulletin relate to broader global and domestic economic trends?

Global Context: Amid US-China trade wars and geopolitical tensions, India's focus on self-reliance (Atmanirbhar Bharat) helps buffer shocks; rising exports to Europe and Africa offset US losses.

Domestic Outlook: With inflation low, RBI may consider rate cuts later in 2025 to boost growth; GST 2.0 reforms simplify business, potentially increasing credit demand and FDI, as noted by Goldman Sachs.

MCQ Facts

Mains Question