• The Reserve Bank of India (RBI) predicts a resurgence in India's economy in the second half of 2024-25, driven by domestic private consumption and rural demand.
• Despite inflationary concerns, the RBI eased monetary conditions by cutting banks' cash reserve ratio for the first time in over four years.
• India's GDP growth rate fell to 5.4% in the July-September quarter, with inflation in November exceeding the RBI's medium-term target of 4%.
• The RBI report emphasizes the need to address inflation and revive investment, with the Indian economy showing recovery signs, but global challenges pose potential risks.

India's economy is set to experience a resurgence in the second half of 2024-25, according to the Reserve Bank of India (RBI). The central bank's monthly bulletin, released on Tuesday, suggests that this growth will be driven by domestic private consumption and a sustained revival of rural demand. The RBI's assessment, authored by its staff including Deputy Governor Michael Patra, underscores that India's growth is expected to pick up in the latter half of 2024-25, primarily driven by robust domestic private consumption.

The RBI's Monetary Policy Committee kept its key interest rate unchanged earlier this month citing inflationary concerns. However, it cut banks' cash reserve ratio for the first time in over four years, effectively easing monetary conditions as economic growth slowed. High prices are the cause for demand slowdown in India, and aligning inflation to the central bank's 4% target is key to ensuring sustained economic growth, minutes of the RBI's latest policy meeting showed.

India's Economic Outlook

The RBI's bulletin also highlighted the prospects for agriculture and rural consumption due to the brisk expansion of rabi sowing. The usual winter easing of food prices is setting in and the prospects of private consumption and exports accelerating are getting brighter, it said in the bulletin. Sustained government spending on infrastructure is expected to further stimulate economic activity and investment, the bulletin said. However, global headwinds pose risks to the evolving outlook for growth and inflation.

India's GDP growth rate fell unexpectedly to 5.4% in the July-September quarter, its slowest pace in seven quarters, while inflation in November was well over the RBI's medium-term target of 4%. If inflation is allowed to run unchecked, it can undermine the prospects of the real economy, especially industry and exports, the RBI said.

Recovery Signs and Future Projections

The RBI's State of the Economy report indicates 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. The report also noted that "supported by record-level foodgrain production, rural demand, in particular, is gaining momentum," with sustained government spending on infrastructure expected to further bolster economic activity and investment.

India's GDP growth is projected to reach 6.8 per cent in Q3 and 6.5 per cent in Q4 of the current financial year. In its December monetary policy review, the RBI revised its FY24 growth projection downwards to 6.8 per cent, from an earlier estimate of 7.2 per cent. However, the report also highlighted that global challenges pose potential risks to the country's growth and inflation outlook.

The RBI report stressed that the current moment is critical for addressing inflation and reviving investment, noting that "the time to act is now to excoriate inflation and revive investment strongly, especially as the usual winter easing of food prices is setting in and the prospects of private consumption and exports accelerating are getting brighter."