Near-term outlook favourable to sustain high growth, says RBI report

RBI's monthly report says India's near-term outlook remains strong, supported by benign inflation, fiscal consolidation and renewed FPI interest after trade deals with the EU and the US

India’s near-term economic momentum remains favourable to sustain high growth, amid a benign inflation outlook, according to the Reserve Bank of India’s (RBI’s) monthly State of the Economy report, released on Friday.

 

The recent trade deals with the European Union (EU) and the United States (US) are likely to play a significant role in the coming years by improving market access, which also attracted foreign portfolio investments to return — an indication of early signs of recovery, the report noted.

 

In the Union Budget presented earlier this month, the report said the government reaffirmed its commitment to fiscal consolidation without diluting the focus on long-term growth, with stepped-up allocation towards capital expenditure.

 

 

“The near-term economic outlook for the economy remains favourable and is well-positioned to sustain its high growth momentum, driven by consumption, investment, and productivity-enhancing reforms.” The report noted that headline inflation continues to remain benign as per the first print under the revised CPI series. “Inflation is expected to remain benign and near the inflation target, providing a positive growth-inflation balance in the near term.”   

 

Based on the CPI 2024 base year series, headline inflation stood at 2.8 per cent year-on-year in January.

 

Referring to the India-EU trade agreement and the India-US interim trade agreement, the report said India concluded landmark deals with two of its major trading partners within a month.

 

“With these agreements in place, the labour-intensive sectors and export-oriented industries in India are expected to receive a major support,” it said.

 

The report said the trade deals would improve market access, enhance export competitiveness and integrate Indian firms more deeply into global value chains.

 

The report noted that foreign portfolio investments (FPIs) and the Indian rupee staged a comeback with investor sentiment turning around following the India-EU free trade agreement and the interim India-US trade deal.

 

“In the immediate term, it has led to a change in investor sentiments. FPIs into equity and debt segment staged a comeback in February,” the report noted.

 

After depreciating 2.3 per cent in January, the Indian currency recovered in February, appreciating 1.1 per cent against the dollar. In the current financial year so far, the rupee fell 6 per cent against the dollar.

 

After depreciating 2.3 per cent in January, the Indian currency recovered in February, appreciating 1.1 per cent against the dollar. In the current financial year so far, the rupee has fallen 6 per cent against the dollar.

 

Lauding the fiscal consolidation efforts of the Union Budget, the report said the continued commitment to fiscal consolidation and debt sustainability signals prudent macroeconomic management, which is expected to crowd in private investment.

 

“The gradual reduction in the fiscal deficit, combined with a sustained emphasis on capital expenditure, is expected to crowd in private investment and improve productive capacity,” it said, adding that support to states for capital investment is also likely to reinforce subnational growth and infrastructure development.

 

On financial conditions, the report observed some tightness from the second half of January to mid-February driven by relative tightening in the corporate bond market. “In February, although system liquidity conditions have improved, CP and CD rates have remained elevated.”

 

Following the restoration of adequate liquidity in February due to accelerated government spending and RBI’s liquidity measures, the weighted average call rate transitioned from above the policy repo rate to below it in February, the report said, adding that growth in bank deposits and credit continued to remain robust, with credit growth outpacing that of deposits.