Consumer confidence in India saw a notable improvement in July across both rural and urban regions, signaling a more optimistic outlook on the economy. This upswing is largely credited to a decline in retail inflation and more favourable interest rates, which together have enhanced household sentiment.
In rural areas, the Current Situation Index (CSI)—a measure of perceptions regarding present economic conditions—showed a modest increase. Households reported better prospects in employment, income levels, and overall price conditions. Additionally, the Future Expectations Index (FEI), which gauges sentiment for the coming year, continued to rise for the sixth consecutive time, suggesting a broad-based sense of economic optimism.
Urban consumers reflected a similar trend. Both the current and forward-looking indices improved, indicating growing faith in the economic recovery. While people feel more confident about their present income, there’s still a cautious note when it comes to expectations about future earnings, indicating a balanced perspective amidst recovery.
What’s Fueling the Optimism
A major driver of the improved confidence is shifting perception around inflation. Many households, especially in rural areas, believe that price pressures will continue to ease over the coming year. This optimism is backed by a noticeable decline in both perceived current inflation and expectations for future inflation.
Such changes in sentiment are important, as they can directly influence how people choose to spend and invest. When consumers expect prices to remain stable, they are generally more inclined to increase their consumption and financial commitments, thereby giving a boost to the overall economy.
Loan Demand on an Upward Trend
The outlook for credit growth remains strong. Banks are seeing continued demand for loans across sectors like agriculture, mining, manufacturing, and personal finance. Lending terms are likely to become even more flexible, especially with the festive season on the horizon, which traditionally sees a spike in borrowing activity.
Although there was a seasonal dip in credit demand during the first quarter, projections suggest a rebound in the second and fourth quarters of FY 2025–26. Lending conditions are also expected to ease further for businesses, particularly in manufacturing and services, setting the stage for sustained economic expansion.
Inflation May Resurface in FY27
While inflation is currently under control, the RBI survey points to a possible rise in retail inflation in the next financial year (2026–27). It is expected to increase from 3.1% in FY 2025–26 to 4.4% in FY 2026–27.
This projected uptick is attributed to a mix of domestic and international influences and echoes broader estimates from the Monetary Policy Committee (MPC). Core inflation—which excludes volatile components like food and fuel—is also expected to remain firm, indicating underlying price pressures may persist.
The Road Ahead: Cautious Optimism
The combination of rising consumer confidence and anticipated inflation poses a mixed scenario for policymakers. On one side, the current sentiment suggests potential growth in consumption-driven sectors. On the other, increasing inflation could constrain the RBI’s ability to further reduce interest rates.
For now, the mood among consumers is one of measured optimism. However, with inflation expected to edge higher in FY27, both households and businesses will need to remain vigilant. Timely policy responses will be essential to maintain economic stability and ensure that inflationary pressures do not erode the gains made in consumer sentiment and credit growth.