RBI predicts stronger economic growth in H2 FY25, driven by demand rebound and rural resilience

Kolkata: The second half of the current fiscal year would result in faster economic growth than a relatively circumspect first half, boosted by a visible demand rebound, Reserve Bank of India (RBI) economists said on Friday in their latest assessment of the economy.Rural demand continues to gain momentum, reflecting a resilience in consumption, supported by brighter farm prospects. A revival in public capex on infrastructure is also likely to stimulate growth in key sectors, they said.

“The time is apposite to rekindle the animal spirits, create mass consumer demand and trigger a boom in investment,” the report said, barely a fortnight ahead of the budget.

The economists also pointed to recent moderation in inflation, albeit reinforcing that stickiness in food price rises needed careful monitoring. The report was authored by Michael Debabrata Patra, who retired from the deputy governor’s post on January 15, and other central bank researchers.

Consumption a bright spot

Patra was also the longest serving member of the monetary policy committee.RBI said the views expressed in the report are those of the authors and not necessarily of the central bank. The economists observed a conducive quickening of high frequency indicators of economic activity in the second half of FY25, bearing out the implicit pick-up in real GDP growth for this period in the first advance estimates of the federal statistics office.

“Private final consumption is the brightening spot in the economy, driven by ecommerce and quick commerce, among which it is important to foster competition rather than being restrictive,” the report said. Higher demand through the festive season has created a possibility of faster economic growth in the latter half of the fiscal year, though rising input cost pressures in the manufacturing sector, coupled with weather-related exigencies and global headwinds, pose risks to this outlook. “But winter has its music too – one last crescendo to rage against the dying of the light. This life we leave behind is like an arch through which the untraveled terrain of the future gleams to be followed like a lodestar and discovered. It shall be sought, to the utmost bounds of human thought and endeavour,” the report said. India recorded a fall in second quarter GDP growth to 5.4%, down from 6.7% in the first quarter. This was the lowest print in seven quarters, which finance minister Nirmala Sitharaman had last month described as a temporary blip.

Hard on the pocket

India’s headline inflation eased for the second successive month in December to a four-month low of 5.2%, against 5.5% in November, driven by winter easing of prices. Despite the sequential easing, the level of food inflation continues to remain high, with select key products experiencing high double digits inflation.

“The stickiness in high food inflation, in an environment of firming rural wages and corporate salary outgo, warrants careful monitoring of second-order effects,” the report said. “The battle against inflation is entering a new phase, with fresh upside threats on the horizon – the weaponisation of uncertainty – and the future path of interest rates is becoming hazy.”

Food inflation was 7.7% in December as compared with 8.2% in November. Inflation in vegetables, and edible oils and fats prices was 26.6% and 14.6% respectively, which together contributed to 61% of the latest food inflation print.