RBI outlines why India’s growth is set to rebound in H2 FY25

India’s economic growth trajectory is poised to lift in the second half of 2024-25, driven mainly by resilient domestic private consumption demand, the Reserve Bank of India (RBI) said in its monthly bulletin released on Tuesday.

Sharing their views on the state of the economy, the RBI economists say that rural demand, in particular, is gaining momentum, thanks to a record level of foodgrains production.

Moreover, sustained government spending on infrastructure is expected to further stimulate economic activity and investment. "Global headwinds, however, pose risks to the evolving outlook for growth and inflation," says the central bank.

India's gross domestic growth (GDP) growth slowed to a seven-quarter low of 5.4% in the second quarter of the ongoing fiscal against 8.1% in Q2:2023-24 and 6.75 in Q1:2024-25.

The decline in growth was caused mainly by a substantial deceleration in industrial growth from 7.4% in the first quarter to 2.1% in the second quarter due to the subdued performance of manufacturing companies, contraction in mining activity and lower electricity demand.

In the wake of the slowdown, the central bank slashed the GDP growth forecast for 2024-25 to 6.6% from 7.2% earlier. It projected Q3 FY25 GDP at 6.8% and Q4 at 7.2%.

The RBI says the high-frequency indicators (HFIs) for the third quarter of 2024-25 show 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. "The prospects for agriculture and hence rural consumption are looking up with brisk expansion of rabi sowing. Headline CPI inflation moderated to 5.5 per cent in November 2024 on the back of easing food prices."

India's retail inflation eased to 5.48% in November after crossing the RBI's upper tolerance band of 6% in October 2024 amid the influx of fresh farm produce that helped soothe the vegetable prices. With this, the retail inflation fell back within the RBI's medium-term target range.

The RBI says the global economy stands ready to enter 2025 with resilience as disinflation and monetary policy pivots gain traction, supported by recovering real incomes, steady labour markets, and a gradual revival in global trade. Among challenges, the RBI says those persist in the form of ongoing geopolitical tensions, concerns over growing protectionism and a large public debt overhang. These developments have adverse implications for emerging market economies (EMEs), with their currencies and equities vulnerable to the sharp bouts of declines seen in 2024 in a highly uncertain environment for trade and capital flows.

Going forward, the RBI says expectations around India’s resilient growth trajectory are also coalescing with more sustainable underpinnings given positive climate action, with an increased policy focus on renewable energy, electric vehicles (EVs), green hydrogen, and steps towards institutionalising the carbon market. "These concerted efforts indicate a promising path toward achieving net-zero emissions. Leveraging global frameworks for carbon trading and scaling climate finance, including green bonds, will further reinforce decoupling of growth and emissions."

The RBI says alongside, India is riding the wave of digitalisation to boost growth, improve productivity and enhance the reach of products and services, which underscores growing investor confidence.