Indian economy recovering from Q2 slowdown, global headwinds pose risk for growth, inflation: RBI bulletin

"These developments have adverse implications for emerging market economies (EMEs), with their currencies and equities vulnerable to the sharp bouts of declines seen in 2024 in a highly uncertain environment for trade and capital flows," the article stated.

The country's growth trajectory is poised to lift in the second half of 2024-25, driven mainly by resilient domestic private consumption demand, according to the bulletin.

"High frequency indicators (HFIs) for the third quarter of 2024-25 indicate that the Indian economy is recovering from the slowdown in momentum witnessed in Q2, driven by strong festival activity and a sustained upswing in rural demand," the bulletin said.

Continued government investment in infrastructure is expected to further boost economic activity and private investment, even as global uncertainties pose risks to growth and inflation projections.

"Expectations around India’s resilient growth trajectory going forward are also coalescing with a more sustainable underpinnings in view of positive climate action, with increased policy focus on renewable energy, electric vehicles (EVs), green hydrogen, and steps towards institutionalizing the carbon market," the authors said.

India's GDP growth slowed to a seven-quarter low of 5.4 per cent during the July-September period of the current fiscal year.

The bulletin also provided insights into government finances, banks' reserve maintenance, and the impact of the real effective exchange rate (REER) on India's trade balance.

The analysis of government finances noted buoyant tax collections in the first half of 2024-25, driven by income tax and GST, while non-tax revenues benefited from higher surplus transfers by the RBI. However, state capital expenditures declined during the period, raising concerns about potential resource diversion due to pre-election sops announced by several states.

"Several States have announced sops in their 2024-25 Budgets; such spending may divert resources away from critical social and economic infrastructure development," it said.

On the banking front, the RBI bulletin observed improved efficiency in daily reserve maintenance, supported by policy changes such as the automated sweep-in and sweep-out (ASISO) facility, which reduced inter-bank volatility.

The RBI said the views expressed in the bulletin are of the authors and do not represent the views of the central bank.