GDP to grow 6.6% in FY25; protective trade policies, moderation in urban demand pose risk: RBI report

The global financial system demonstrated resilience in the face of slowing economic activity, rising policy uncertainty, and heightened geopolitical tensions, the Reserve Bank of India (RBI) said on Monday.

The central bank, however, cautioned against vulnerabilities in the form of elevated public debt and stretched asset valuations.

"Spells of high volatility in the global financial markets suggest continued uncertainty on future growth prospects," the RBI said in its latest financial stability report (FSR).

Amid global challenges, the Indian economy and financial system, according to the report, remain strong and stable, supported by sound macroeconomic fundamentals, healthy balance sheets of banks and non-banking financial institutions, and low market volatility.

The report projected India’s real GDP to grow by 6.6% in 2024-25, driven by rural consumption recovery, increased government spending, and strong service exports.

"On the downside, the softness in industrial activity, especially in the manufacturing sector, moderation in urban demand, global spillovers and protective trade and industrial policies pose risks to the outlook," it noted.

On inflation, FSR said that going forward, the disinflationary effect of a bumper kharif harvest and the rabi crop prospects are expected to soften prices of foodgrains. On the flipside, the rising frequency of extreme weather events like heat waves and unseasonal rains continue to pose risks for food inflation dynamics.

The RBI asserted that the Indian banking system continues to exhibit resilience, with strong capital buffers, solid earnings, and declining asset impairments. The gross non-performing assets (GNPA) ratio of scheduled commercial banks fell to a multi-year low of 2.6% in September 2024, while net NPAs declined to 0.6%, according to the report. The common equity tier 1 (CET1) ratio stood at 14%, well above the regulatory requirement of 8%.

The Banking Stability Indicator (BSI) showed improvement across several parameters, including soundness, efficiency, and asset quality, though profitability was weighed down by narrowing net interest margins, according to the report.

It also said that macro stress tests demonstrate that most SCBs have adequate capital buffers relative to the regulatory minimum threshold even under adverse stress scenarios. Stress tests also validate the resilience of mutual funds and clearing corporations.