A broad-based gaining of momentum is discernible in high frequency economic indicators despite external risks, the Reserve Bank of India (RBI) said on Thursday, adding that a moderation in retail inflation in September from its July peak strengthened the macroeconomic fundamentals.
“In the assessment of the monetary policy committee, the outlook for domestic activity is brightening on account of the sustained buoyancy in services, consumer and business optimism, public spending on infrastructure,” RBI said in its state of the economy report.
Capacity utilisation in the manufacturing sector, on a seasonally adjusted basis, increased to 75.4% in April-June from 74.1% in the previous quarter. Deleveraging and higher capacity utilisation have enabled capital-heavy industries to gain traction, it added.
Growth momentum would be propelled by festival season spending in the near term.
The RBI’s enterprise surveys for July-September showed that businesses sustained the positive sentiments on robust demand conditions. Manufacturers’ optimism on demand conditions is expected to support high capacity utilisation in the coming quarters.
Overall business sentiment in the manufacturing, services and infrastructure sectors remained positive for the remaining quarters of the current financial year, RBI said.
Senior loan officers anticipate demand for bank loans to be robust in the second half of the current financial year.
While some moderation in employment is expected in October-December, this will improve in January-March across sectors.
While input cost pressures are likely to persist in manufacturing sector, services and infrastructure companies expect cost pressure to be lower than the current level. Also, movement in selling price growth is expected to be in synch with input cost pressure, RBI said.
Separately, merchant payments will also drive growth in the Indian digital payment ecosystem due to low transaction fees and expanding acceptance. Peer-to-merchant transactions in India are expected to constitute 75% of all UPI transactions by 2025, from 58.5% as of September 2023.
Recent digital innovations, including conversational payments, the UPI Tap and Pay facility, and credit lines on the UPI are expected to further boost adoption of digital payments, RBI said.
Globally, surging yields and soaring crude oil prices are key risks to growth. Tight financial conditions engendered by higher-for-longer stances in monetary policy settings have punctured asset price inflation, with surging bond yields forcing equity markets into correction and, have resulted in a rise in the US dollar.
The recent rally in crude prices is undermining the overall growth prospects of various emerging market economies. The situation is compounded by rising food prices, and geopolitical tensions.
Nevertheless, RBI observed in its latest monetary policy that the expected correction in vegetable prices and the recent reduction in LPG prices could improve the near-term inflation outlook. Also, a major positive development is the relative stability in core inflation.