Between April and June 2026, the Strait of Hormuz ran at a fraction of its normal traffic. Brent touched $120 a barrel, the rupee fell to a record, and the producer price index for crude petroleum rose 58%. In that quarter, the Indian economy grew 7.8%, against the 7% the Monetary Policy Committee had pencilled in. Real GVA grew 8.2% and nominal GDP 10.3%. The United States grew 1.5% in the same quarter, China 4.3%, and Britain 0.4%.
It was a broad quarter, not a lucky one. Manufacturing grew 9.2%, construction 7.7%, services 10.0%. Gross fixed capital formation grew 11.9% in real terms, lifting the investment rate from 31.4 to 34.3% of GDP. Private consumption grew 7.1%. Exports grew 12% through a tariff wall and a war. Government consumption grew only 4.3%, so the private economy did the work. Listed company operating profit rose 19.3%, bank credit is growing 19.3%, net FDI doubled to $7.8 billion and the Centre’s net tax revenue rose 17.8%.
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Timely Policies
Policy earned part of that. Retail petrol was held at Rs. 108.7 a litre and diesel at Rs. 98.1 through the shock, so the household consumption deflator was 2.6% when the import deflator exceeded 30%. The FCNR(B) swap window brought in $65.4 billion and stopped the rupee’s slide becoming a rout. Foodgrain stocks at 4.7 times the buffer norm held cereal prices while the monsoon faltered. Last year’s tax relief put money in households’ hands as oil took it out. Five challenges now stand between the June quarter and a full year above 7%, and each has a fiscal and a monetary answer.
The first is oil. The Indian basket averaged $89.7 a barrel in August and the Chief Economic Adviser expects no material fall. Holding retail prices has cost the exchequer twice, with major subsidies up 37.4% and excise collections down 22.4%. The fiscal tool is excise as a two-way buffer. The cut absorbed the shock on the way up. It must be restored, pre-announced and mechanical, on the way down, so the Budget recovers what it spent while the pump price stays flat. The fertiliser subsidy, up 57.6%, should move to a per-hectare transfer before the next kharif. The monetary tool is patience. Core inflation excluding precious metals was 2.7% in July. An oil shock with a stable core is a relative price change, not an inflation process, and the MPC should keep looking through it.
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The second is the monsoon. The rainfall deficit narrowed from 38% at end June to 13% at end July and kharif acreage reached 92% of normal, but all four regions remain in deficit and the IMD expects August and September below 94% of the long period average. Meat, eggs and spices are already above 12% inflation. The fiscal tools are in hand and should be used at scale. Release rice and wheat through the OMSS in volumes that move market prices. Cut import duty on pulses and edible oils to zero for the season if September fails. Frontload VB-G RAM G to deficit districts, since rural unemployment rose in the June quarter while demand for work under the new scheme fell 39.2% in July. The monetary tool is the RBI’s own projection of 5.9% CPI in the December quarter. If the outturn matches, hold. If food pushes it above 6% for two quarters, hike 25 basis points rather than write the letter the framework requires.
Don’t Crowd The Rupee
The third is the rupee and the money created to defend it. At 95.7 to the dollar, the currency is past its March record, and the FCNR(B) window closed on August 31. The rupees issued against those dollars are why daily liquidity absorption averaged Rs. 3.48 lakh crore in August against Rs. 0.89 lakh crore in June. The monetary tool is sterilisation. The RBI absorbed Rs. 12.68 lakh crore through variable rate reverse repos in August and should extend to longer tenors, with outright OMO sales if the surplus stays above Rs. 3 lakh crore, so that liquidity created to defend the currency does not become the fuel for 19.3% credit growth against 15.4% deposit growth. The exchange rate should find its level with reserves used to smooth, not to hold a line. The fiscal tool is discipline in the borrowing calendar. With corporate bond issuance down to Rs. 1.88 lakh crore from Rs. 2.95 lakh crore, the sovereign should not crowd the same rupees.
The fourth is trade. The additional 10% Section 301 tariff took effect on July 24. Smartphones, petroleum products and pharmaceuticals are exempt, which is why exports to the United States grew 12.9% in July. But garments, gems and jewellery, leather and ceramics all contracted, and these are the sectors that employ. The fiscal tools are cheap and targeted. Extend interest equalisation at 3 per cent to labour-intensive exporters for the life of the tariff. Fix RoDTEP rates for garments and leather at the full incidence of embedded taxes. Close the European Union and United Kingdom agreements, whose tariff preferences are worth more to a garment exporter than any domestic scheme. The monetary tool is the exchange rate policy already described. A rupee allowed to adjust is the one export subsidy that costs the Budget nothing.
The Handover
The fifth is the handover, which decides the year. The tax relief that lifted consumption is a level shift whose contribution fades from the fourth quarter. The Centre’s capex grew 23.7% in the June quarter, down from 52.0% a year ago. The base hardens, with the last three quarters of 2025-26 at 8.1, 7.7 and 8.6%. Private investment has to take over, and the June quarter says it has begun, with capital goods output up 15.2% and machinery imports up 51.5%. The fiscal tool is to hold public capex flat in real terms and route the increment through the 50-year interest-free loans to states, where the multiplier is highest and capex growth, at 6.8%, lowest. No new consumption stimulus. Nominal GDP at 10.3% against the 12.5 to 13% assumed leaves no room, and the economy does not need it. The monetary tool is transmission. With the incremental credit-deposit ratio at 99.6, the constraint on private investment is the deposit base, not the policy rate. The RBI should keep liquidity adequate for 19% credit growth while using its macroprudential tools on unsecured retail and gold loans to stop it from becoming the next asset cycle.
The June quarter was not resilience by accident. It was public capital formation that private capital is now following, a price regime that shielded the household, and a central bank that bought time with the diaspora’s savings. The next three quarters need the same discipline in reverse. Recover the excise. Sterilise the liquidity. Let the rupee go where it must. Fund the states. Hold the revenue account. The economy has shown what it can do with a shock. The framework now has to show what it can do with a recovery.
(The author was with the Economic Advisory Council to the Prime Minister)
Disclaimer: These are the personal opinions of the author
