Economy Recovering From Slowdown Witnessed In 2nd Quarter: RBI Bulletin

The Indian economy is recovering from the slowdown in momentum witnessed in the September quarter, driven by strong festival activity and a sustained upswing in rural demand, according to a Reserve Bank of India (RBI) bulletin released on Tuesday.

An article on the ‘State of the Economy’ in the December bulletin noted that the global economy continues to exhibit resilience with steady growth and moderating inflation.

“High frequency indicators (HFIs) for the third quarter of 2024-25 indicate that the Indian economy is recovering from the slowdown in momentum witnessed in Q2, driven by strong festival activity and a sustained upswing in rural demand,” it said.

The article further said the growth trajectory is poised to lift in the second half of 2024-25, driven mainly by resilient domestic private consumption demand.

“Supported by record level foodgrains production, rural demand, in particular, is gaining momentum. Sustained government spending on infrastructure is expected to further stimulate economic activity and investment,” the authors said.

Global headwinds, however, pose risks to the evolving outlook for growth and inflation, said the article authored by a team led by RBI Deputy Governor Michael Debabrata Patra.

India’s GDP growth slowed to a seven-quarter low of 5.4 per cent during the July-September period of the current fiscal year.

The article said that from the expenditure side, the major factor contributing to the decline in the growth rate of the economy is fixed capital formation and from the production side, the main concern is manufacturing.

“Undermining both is inflation. The erosion of purchasing power due to repeated inflation shocks and persisting price pressures is starkly reflected in weakening sales growth of listed non-financial nongovernment corporations,” it said.

Their outlook on demand conditions also remains subdued as no let-up in the incidence of price shocks seems to be in sight; they will increasingly be inclined to pass on input costs to selling prices.

Consequently, there is no robust capacity creation by investing in fixed assets. Instead, corporations are churning and utilising existing capacity to meet the inflation-dented consumer demand, the article said.

“The result is lacklustre private investment. The slowdown in consumer demand seems to be associated with slower corporate wage growth,” it said.

The authors further said another headwind emerging is the slowing rate of nominal GDP growth, which could hinder fiscal spending, including on capex, to achieve budgetary deficit and debt targets.

The article also noted that as per the projections based on the in-house Dynamic Stochastic General Equilibrium (DSGE), real GDP growth is likely to recover to 6.8 per cent and 6.5 per cent in Q3 and Q4 of 2024-25, respectively.

Growth for 2025-26 is projected at 6.7 per cent while headline CPI inflation (retail) is projected to average 3.8 per cent in 2025-26.

In the December monetary policy, the RBI had projected the GDP growth for 2024-25 at 6.6 per cent with Q3 at 6.8 per cent; and Q4 at 7.2 per cent. GDP growth for the April quarter of 2025-26 was projected at 6.9 per cent; and Q2 at 7.3 per cent.

The RBI said the views expressed in the bulletin are of the authors and do not represent the views of the central bank.

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