Demand driving growth, but economic outlook ‘somewhat clouded’ by supply issues: RBI

While India’s domestic demand remains a key driver of growth, the near-term outlook for the economy is “somewhat clouded” due to supply side pressures brought on by the West Asia crisis, the Reserve Bank of India (RBI) said in a new report.

“Domestic demand continues to be the key driver of growth,” the RBI said in its latest State of the Economy report as a part of its monthly bulletin for April 2026. “However, the near-term outlook is somewhat clouded by supply side pressures.”

“Although headline inflation remains firmly within the tolerance band, the pass through to domestic prices needs to be monitored,” it added. “The financial conditions, crude oil prices and capital flows continue to pose challenges to the external sector outlook.”

Mixed demand conditions

The central bank noted that, while e-way bills continued to hit double-digit growth, and petrol and diesel consumption continued to grow, overall petroleum consumption fell in April due to a sharp fall in the consumption of naphtha, liquified petroleum gas (LPG) and other petroleum products. 

Similarly, while higher temperatures led to a sharp increase in electricity demand, the monthly number of toll transactions continued to decline, although the RBI attributed this to the introduction of the FASTag Annual Pass scheme in August 2025.

“Demand remained broad-based and supported by rural markets,” the RBI noted. “Automobile sales in rural areas continued to grow at double digit in April, although showing some sequential moderation. The tractors and two-wheelers sales within the automobile segment in rural and passenger vehicles sales in urban areas continued to witness robust growth.”

On the other hand, it added that, due to the increase in prices of aviation turbine fuel, the air passenger traffic declined further in April.

Labour market worsens

Notably, the central bank said that labour market conditions witnessed some moderation in the January-March 2026 quarter, with the labour force participation rate and worker population ratio declining alongside a rise in the unemployment rate, which it said was largely driven by rural areas.

“It was, however, accompanied by an increase in the share of regular salaried employment, with higher employment in the secondary and tertiary sectors,” the RBI noted.

Higher costs affect supplies

On the supply side, the RBI said that sowing in the summer season has been “progressing well”, surpassing the full season normal acreage and is higher than the previous year. It added that the acreage under all major crops is higher, except for rice.

“Based on high frequency indicators, industrial activity exhibited resilience in April, despite the ongoing West Asia conflict,” the RBI said. “The index of eight core industries witnessed an uptick, supported by cement, steel and electricity production. Manufacturing PMI also rose marginally as cost pressures and geopolitical spillovers kept growth momentum in new orders and output slow.”

On the services front, the central bank said that the sector remained resilient in April. However, it added that while the Services PMI accelerated, supported by a boost in transportation activity enabled by domestic suppliers and new business orders, the pace of export orders “displayed weakness”, hit by the war in West Asia and subdued inbound tourism.