The Reserve Bank of India (RBI) has signalled that the economic slowdown seen during the first half of fiscal year 2024-25 is now behind the country, with signs of strong recovery.
According to the latest RBI bulletin, private spending is back in full swing, driving economic activity, particularly in the third quarter. Festival spending has acted as a catalyst, sparking a surge in real economic activity.
RBI’s in-house economists, led by Deputy Governor Michael Debabrata Patra, expressed confidence that the domestic economy is well-positioned for strong growth despite global uncertainties.
These uncertainties include rising protectionism and the potential return of Donald Trump to the White House with more radical economic plans. However, the economists believe that India's economy remains insulated from such global challenges, and the first-half slowdown is now firmly behind.
The bulletin highlights that private consumption has once again become a key driver of domestic demand. This recovery in consumption is reflected in the spike in economic activity, with festival-related spending pushing up growth in the third quarter.
Despite this optimistic outlook, the RBI also issued a cautionary note on inflation. The economists warned that any leniency towards inflation could undo the progress made in recent years. They emphasised that unchecked price rises could undermine the country's real economic growth.
RBI’s economists also noted that the global financial environment remains challenging, with the hardening of the US dollar and ongoing pressure on equities due to persistent portfolio outflows. Domestically, inflation spiked in October, driven by rising food prices.
However, despite these challenges, the economists remain optimistic about India’s medium-term economic prospects, crediting the strength of the country’s macroeconomic fundamentals.
One of the key factors behind the subdued economic activity in the first half was the lacklustre performance of private investments, which were held back by weak corporate earnings.
However, the bulletin noted that there has been a moderation in staff cost growth and an increase in non-operating income, which has helped boost net profits for several sectors. Notably, the oil and gas sector continues to struggle, while the financial services sector has performed well.
The RBI bulletin suggests that while challenges remain, particularly with inflation and global economic pressures, India’s economy is on track for strong growth in the second half of the fiscal year.
Private consumption is expected to continue driving domestic demand, and with a stable macroeconomic foundation, the medium-term outlook remains positive. However, the need to maintain vigilance on inflation is crucial to safeguarding the country’s economic gains.
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