RBI article signals economic momentum rise in H2FY25 amid strong demand

High frequency indicators, like vehicles sales, air traffic, steel consumption and GST E-way bills, point towards a sequential pickup in momentum of economic activity during the second half of the fiscal 2024-25 and sustain moving forward, RBI Bulletin said on Wednesday.

However, a strong dollar, driven by US economic resilience and trade policy pivots, could exacerbate capital outflows from emerging economies, push risk premiums higher, and intensify external vulnerabilities, said an article on 'State of the Economy' published in RBI's February bulletin.

Economic activity momentum is poised to be sustained, strong rural demand is expected to receive a further fillip from the robust performance of the agriculture sector. Urban demand is also poised for a recovery, tracking decline in inflation as well as a boost to disposable incomes from the sizeable income tax relief announced in the Union Budget 2025-26.

"...high frequency indicators point towards a sequential pick-up in momentum of economic activity during H2:2024-25, which is likely to sustain moving forward," it said.

The economic activity index (EAI) is constructed by extracting the common trend underlying 27 high frequency indicators of economic activity using a Dynamic Factor Model.

It also noted that the global economy continues to grow at a steady but moderate pace, with divergent outlook across countries amid rapidly evolving political and technological landscapes.

Financial markets remain on edge on the slowing pace of disinflation and the potential impact of tariffs. Emerging market economies (EMEs) are witnessing selling pressures from foreign portfolio investors (FPIs) and currency depreciation engendered by a strong US dollar, the article said.

The central bank said the views expressed in the article are of the authors and do not represent the views of the Reserve Bank of India.

The authors further said the budget measures to fuel four engines of growth agriculture, MSMEs, investment and exports are expected to boost medium-term growth prospects of the Indian economy.

"The Union Budget prudently balances fiscal consolidation and growth objectives by continued focus on capex alongside measures to support consumption while providing a clear roadmap for debt consolidation," the article said.

Further, domestic demand is also expected to benefit from the repo rate cut by the Monetary Policy Committee (MPC) in its meeting on February 7, 2025.

The article also said there was an increase in the share of public sector banks (PSBs) in volume of transactions (from remitter bank side) during January 2025 as compared to the levels recorded a year ago.

The number of technical declines per 10,000 UPI transactions reduced across most bank categories in January 2025 compared to January 2024, reflecting enhanced efficiency of banks' systems despite higher transaction volumes.

A rising US dollar and FPI outflows from EMEs amidst growing global uncertainties exerted significant pressure on EME currencies during January 2025.

The Indian rupee (INR) depreciated by 1.5 per cent (m-o-m) in January, in line with movements in most major currencies.

"In an environment of heightened global market turbulence, the INR exhibited relatively low volatility," the article said.

FPI flows turned negative in January 2025, reflecting heightened global uncertainties. Net FPI outflows worth USD 6.7 billion were recorded with equity outflows of USD 8.4 billion amidst rising risk-off sentiments among investors.

Gross inward foreign direct investment (FDI) rose by 20.6 per cent (y-o-y) to USD 62.5 billion during April-December 2024.