The Indian economy is projected to grow at a healthy pace of 6.6% in the financial year 2024-25, according to the Reserve Bank of India (RBI) report.
This optimism is driven by a combination of factors, including a strong revival in both urban and rural demand, increased government consumption, higher investment, and robust exports in the services sector.
The report, released as part of the December 2024 issue of the Financial Stability Report (FSR), underscores the resilience of the Indian economy despite global challenges and domestic inflationary pressures.
The FSR report reflects the collective assessment of the Financial Stability and Development Council's Sub-Committee, which evaluates the health of India's financial system and identifies risks to its stability.
One of the key highlights of the report is the positive outlook for the Indian financial sector, particularly the scheduled commercial banks (SCBs), which have shown remarkable improvements in profitability.
Non-performing assets (NPAs) have declined, capital buffers remain adequate, and liquidity positions are strong. Additionally, key metrics such as the return on assets (RoA) and return on equity (RoE) have reached decade-long highs, and the gross NPA ratio has fallen to its lowest point in several years.
This signals that Indian banks are in a strong position to weather financial pressures in the coming months.
Moreover, the report's macro stress tests reveal that the resilience of the banking sector remains intact, even under adverse economic conditions. These tests indicate that the SCBs are well-capitalised, with sufficient buffers to meet regulatory requirements.
The results also suggest that other financial institutions, such as mutual funds and clearing corporations, are similarly robust in the face of economic stresses.
Despite the moderation in growth in the first half of 2024-25, where the real GDP growth decelerated to 6% compared to 8.2% and 8.1% in the first and second halves of the previous financial year, the long-term growth prospects remain positive.
The report indicates that the expected recovery in the second half of the year, particularly in the third and fourth quarters, will be driven by a resurgence in domestic demand.
Public consumption and investment are expected to rise, which will further contribute to the growth in services exports. Additionally, the easing of financial conditions is anticipated to support this recovery.
One area that has shown significant improvement is rural consumption, which is expected to provide a major boost to the economy. The RBI report suggests that demand from rural areas is on the rise, backed by improved agricultural output and increased spending power.
This shift is likely to be a critical driver for India’s growth, complementing the pick-up in urban demand.
While inflation remains a concern, the report suggests that a bumper harvest from the kharif crops and positive prospects for the rabi crop are likely to keep foodgrain prices in check, contributing to a disinflationary effect.
This will be beneficial in controlling overall price pressures in the economy. However, the report also highlights the risks associated with food inflation, particularly due to the rising frequency of extreme weather events.
Climate change and erratic weather patterns are likely to impact agricultural output and food supply chains, leading to potential inflationary pressures on food prices.
In addition to weather-related risks, the report points to the ongoing geopolitical tensions and geo-economic fragmentation as external factors that could affect the global supply chain.
These dynamics have the potential to drive up commodity prices, further affecting inflation and the cost of living. The RBI remains cautious of these global uncertainties and their potential to disrupt India’s economic recovery.
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