Indian economy’s road to recovery? Private consumption driving domestic demand again, says RBI

In India, the "slack in speed" observed in the second quarter of 2024-25 is behind us as private consumption is back to being the driver of domestic demand with festival spending lighting up real activity in Q3, said Michael Patra, Deputy Governor of the Reserve Bank of India (RBI) in RBI's latest bulletin.

Global economic activity remained resilient during Q4:2024 amidst fragile confidence and rising protectionism, said the RBI deputy chief.

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Domestic financial markets are seeing corrections with relentless hardening of the US dollar and equities being under pressure from persistent portfolio outflows, he added.

"The medium-term outlook remains bullish as the innate strength of the macro-fundamentals reasserts itself. Headline consumer price index (CPI) inflation rose above the upper tolerance band in October 2024 with a sharp surge in the momentum of food prices along with an increase in core inflation. "

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A slow second quarter:

India’s economic growth is projected to slow in the second quarter of this fiscal year, with GDP estimated to grow by 6.5% year-on-year (YoY), down from 6.7% in the first quarter, according to ICRA.

ALSO READ: Economy likely to grow 6.7% in FY25 due to weaker Q2 performance: Report

This moderation is attributed to challenges such as heavy monsoon rains and weaker corporate margins, which offset the positive effects of increased government capital expenditure and a strong kharif sowing season. Gross Value Added (GVA) is also expected to see a marginal dip, with growth estimated at 6.6% in Q2 FY2025, compared with 6.8% in Q1 FY2025.

“Q2 FY2025 saw tailwinds in terms of a pick-up in capex after the Parliamentary Elections as well as healthy expansion in sowing of major kharif crops. However, sectors faced headwinds due to heavy rainfall and weak margins. We project a slight dip in India’s GVA and GDP growth in Q2 FY2025 to 6.6% and 6.5%, respectively,” Aditi Nayar, Chief Economist at ICRA, wrote in a note.

For the full fiscal year, ICRA projects GDP growth at 7.0% and GVA growth at 6.8%, reflecting a back-ended recovery.