Economists caution on RBI's growth optimism, project FY25 growth below 7.2%

RBI's confidence on growth has surprised market participants at a time when high frequency indicators pointing towards slowing economic activity

While changing its monetary policy stance to neutral, the Monetary Policy Committee of the Reserve Bank of India (RBI) outlined a list of upside risks to its inflation projection, including unexpected weather events, geopolitical conflicts, volatile international crude oil prices, and a recent uptick in food and metal prices. The inflation projection was retained at 4.5 per cent for FY25.

On the other hand, the RBI expressed a more positive outlook on growth. RBI Governor Shaktikanta Das said India’s growth story remains intact, as its fundamental drivers — consumption and investment demand — are gaining momentum.
 

The RBI kept its real gross domestic product (GDP) growth forecast unchanged at 7.2 per cent for FY25, raising the estimate for the second half of FY25 to 7.4 per cent, despite lower numbers in the first quarter and a downward revision of the second-quarter estimate to 7 per cent from 7.2 per cent. The RBI’s confidence in growth has surprised market participants, especially given that high-frequency indicators suggest slowing economic activity.

 

“While economic growth has remained healthy, there are early indications of softness,” said a report by CareEdge ratings, citing recent high-frequency indicators, such as passenger car sales, toll collections, steel consumption, and petroleum consumption. “Growth momentum has remained strong in the past, but there have been indications of weakness in high frequency indicators,” a note from Axis Mutual Fund said.
 

Most economists estimate FY25 GDP growth to be lower than the RBI’s projection. “We are seeing growth at 6.5 per cent in FY25,” said Madhavi Arora, Lead Economist, Emkay Global Financial Services. “We are looking at the GDP-GVA wedge to sort of collapse and relatively slower consumption story compared to what the RBI is taking, and relatively modest growth in manufacturing also,” she added.
 

The CareEdge report estimated FY25 GDP growth at 7 per cent.  Dharmakirti Joshi, chief economist at CRISIL, said: “We estimate growth at 6.8 per cent for FY25, slightly moderated due to the impact of interest rates and reduced fiscal stimulus.”
 

The Indian economy grew at 6.7 per cent Y-o-Y in the first quarter of FY25 below the RBI’s projection of 7.1 per cent.
 

Last year the 8.2 per cent growth had a lot of one-offs that had helped FY24 GDP, such as sharp contraction subsidy payments, which boosted GDP, said Gaura Sengupta, economist, IDFC First Bank. “Then, the GDP deflator slowed down significantly. That ended up lifting the real growth rates. The input costs had fallen sharply. So, the company profits went up even though sales growth had slowed. This year all those one-off factors will not be there,” said Sengupta. “Our estimate is 6.5-7 per cent. We don’t view it as weak. It’s just that last year there were a lot of one-offs,” she added.
 

Das has emphasised that strong growth momentum allows the RBI to focus on the last mile of disinflation, which has been slow. It remains to be seen whether slowing growth prospects will create room for a rate cut when the rate-setting panel reviews policy in December.

“We think growth is gradually, but surely, moderating, as shown by recent high-frequency indicators, such as GST tax collections, auto sales, and still not recovering government capex among others. This, in conjunction with continued disinflation, suggests that the ‘supporting growth’ part of the MPC's mandate will receive greater focus as inflation comes close to target,” Barclays said in a note.