Lingering geopolitical uncertainties, renewed supply chain pressures due to geopolitical developments in the Middle East, lower reservoir levels, and fall in production of major crops pose upside risks to headline CPI inflation going forward, said the Reserve Bank of India (RBI) in its Annual Report for 2023-24.
On growth, the RBI said that the growth outlook for FY25 remains buoyant, given the government’s sustained focus on capital expenditure while maintaining fiscal consolidation. It says, India’s GDP in the current financial year is expected to grow at 7%, with risks “evenly balanced”.
“Strong corporate balance sheets, rising capacity utilisation, double digit credit growth, healthy financial sector, and the ongoing disinflation are likely to be other growth levers,” the RBI said. But lingering geopolitical tensions, geoeconomic fragmentation and adverse climate shocks impart downside risks to the outlook, it added.
The RBI mentioned that the softening of the headline rate in FY24 was the outcome of the sustained “anti-inflationary” monetary policy stance, proactive supply management measures by the government and correction in global commodity prices. The RBI has projected CPI inflation to average 4.5% in FY25, much lower than 5.4% in FY24. “As headline inflation eases towards the target, it will spur consumption demand especially in rural areas,” the RBI said.
In FY24, the domestic economy exhibited robust growth, underpinned by strong investment activity, amidst subdued external demand. Manufacturing and services sectors were the key drivers on the supply side while agricultural activity slowed down due to uneven and deficient monsoon rainfall, the RBI noted. The National Statistical Office (NSO) has projected FY24 growth to come in at 7.6%, but an FE poll of 19 economists has pegged the growth at 7.8%.
The RBI says that the Central government’s impetus to growth-inducing capital spending is likely to be sustained in 2024-25 with more than half of borrowings directed towards financing of capital outlay. The Centre has pegged the capital expenditure target for FY25 at Rs 11.11 trillion, up from Rs 9.5 trillion in FY24.
Moreover, the budgeted reduction in gross market borrowings from 5.3% of GDP in 2023-24 (RE) to 4.3% of GDP in 2024-25 (BE) will enhance the flow of funds to the private sector and support private investment, the central bank said.
To sum up, the RBI says, the Indian economy is navigating the drag from an adverse global macroeconomic and financial environment. Real GDP growth is robust on the back of solid investment demand which is supported by healthy balance sheets of banks and corporates, the government’s focus on capital expenditure and prudent monetary, regulatory and fiscal policies, it said.