India’s economic growth is poised to rebound as domestic demand regains strength, though elevated food inflation needs careful monitoring of second-order effects, according to the Reserve Bank of India’s (RBI) State of the Economy report released on Friday. The report observed that banks are becoming reluctant to lend in the money market amid tight liquidity conditions.
According to the report, rural demand continues to gain momentum, reflecting a resilience in consumption supported by brighter agricultural prospects.
India’s gross domestic product (GDP) growth fell to a seven-quarter low of 5.4 per cent during the July–September period of the current financial year. For FY25, GDP growth is projected to slow to a four-year low of 6.4 per cent, according to the first advance estimates for FY25 by the National Statistics Office (NSO).
The RBI report, however, said a revival in public capital expenditure on infrastructure is expected to stimulate growth in key sectors. At the same time, rising input costs in the manufacturing sector, weather-related challenges, and global headwinds could pose risks to this outlook, said the report, authored by RBI staffers, including Michael Patra, who demitted office earlier this week.
The views expressed in the article are of the authors and do not represent the views of the RBI.
The NSO estimates confirmed that India remains the fastest-growing major economy, noted the report, attributing the slowdown in the second half of the current financial year to “a host of unfavourable factors”.
The report cited the impact of localised excess rainfall on non-farm activity, along with a lack of visible private capital expenditure (capex) and moderation in general government capital expenditure, as reasons for sluggish growth in the first half.
“Gross fixed investment in GDP and manufacturing in gross value added (GVA) emerged as the biggest drags on growth,” it said.
Despite this, agriculture and allied activities performed reasonably well on the back of a record kharif harvest and higher rabi sowing, which have improved the fortunes of the rural economy, the report noted.
Inflation worries still weigh as elevated food inflation could have spillover effects, the report cautions.
“Headline inflation eased for the second successive month in December. Despite the sequential easing, the level of food inflation continues to remain high, with select key products experiencing high double-digit inflation.”
Consumer Price Index (CPI) inflation eased to a four-month low of 5.2 per cent in December. Food inflation also decelerated to 7.7 per cent in December though it remained elevated.
“The stickiness in high food inflation, in an environment of firming rural wages and corporate salary outgoes, warrants careful monitoring of second order effects,” it said.
After increasing the policy repo rate by 250 basis points between May 2022 and February 2023, the Monetary Policy Committee (MPC) has kept rates unchanged over the past two years. While some market participants expect rate cuts in February, the combination of slowing economic growth, elevated inflation, and a sharp depreciation of the rupee may act as deterrents.
The report observed a conducive quickening of high-frequency economic indicators in the second half of FY25, aligning with the implicit pickup in real GDP growth projected in the NSO’s annual first advance estimates.
The report said there are early indications that corporate India may post a much better revenue and earnings growth in the third quarter compared to the first half of FY25.
“The time is apposite to rekindle the animal spirits, create mass consumer demand and trigger a boom in investment,” it said.
The report said private final consumption is the brightening spot in the economy, driven by e-commerce and q-commerce among which it is important to foster competition rather than being restrictive. “One way to revive animal spirits may be to provide a consumption boost,” the report said.
It is to be seen if the Centre, which will announce the Union Budget for FY26 on February 1, announced measures to boost private consumption.
Commenting on the recent liquidity tightness in the banking system, the report observed that banks are not on-lending to the money market with the distribution of liquidity among market participants remaining skewed.
“The co-existence of deficit liquidity conditions and funds deployed in the standing deposit facility (SDF) is indicative of skewed distribution of liquidity in the banking system. Furthermore, banks appear to be availing liquidity from the RBI but not on-lending to money markets,” the report said.
Despite tighter liquidity conditions, banks’ placement of funds under SDF averaged Rs 83,000 crore during December 16, 2024 to January 14, 2025, same as during the previous month.
 "Growth set to rebound, food inflation needs monitoring: RBI report")
