Economy rebounds from Q2 slowdown, festive season lead recovery: RBI
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The Indian economy is bouncing back from the deceleration experienced during the second quarter of 2024-25, fueled by robust festival-driven activity and rising rural demand, according to the Reserve Bank of India’s (RBI) December bulletin.
An article titled State of the Economy in the bulletin highlighted the resilience of the global economy, which continues to grow steadily amid moderating inflation. “High-frequency indicators (HFIs) for the third quarter suggest that the Indian economy is regaining momentum, supported by vibrant festival activity and a sustained upswing in rural demand,” the article noted.
The report projects an uplift in growth during the second half of 2024-25, largely driven by resilient domestic consumption. Rural demand, bolstered by record food grain production and government investment in infrastructure, is emerging as a key growth catalyst.
However, global economic challenges pose risks to India’s growth and inflation outlook, according to the team led by RBI Deputy Governor Michael Debabrata Patra.
India’s GDP growth fell to a seven-quarter low of 5.4% during the July-September period, primarily impacted by weaker fixed capital formation on the expenditure side and subdued manufacturing performance on the production side.
Inflation remains a significant hurdle, eroding consumer purchasing power and dampening sales growth in non-financial corporations. Persistent price pressures have also slowed private investment, with corporations hesitant to create new capacity due to subdued demand and rising input costs.
“Corporations are increasingly using existing capacity to meet inflation-dented consumer demand instead of investing in fixed assets, resulting in lackluster private investment,” the article explained.
Additionally, slower corporate wage growth and weakening nominal GDP growth have emerged as headwinds, potentially restricting fiscal spending on capital expenditure and hindering efforts to meet deficit and debt targets.
Despite these challenges, the RBI article projects GDP growth to recover to 6.8% in Q3 and 6.5% in Q4 of 2024-25. For the next fiscal year, growth is forecast at 6.7%, with retail inflation (CPI) expected to average 3.8%.
The RBI’s December monetary policy statement had estimated GDP growth for 2024-25 at 6.6%, with Q3 and Q4 growth projected at 6.8% and 7.2%, respectively. Growth for the first two quarters of 2025-26 is expected at 6.9% and 7.3%.