India’s growth outlook positive despite global uncertainties

India’s economic activity is gaining sustained momentum, with high-frequency indicators signaling a sequential growth pickup in the second half of FY 2024-25. Key metrics such as vehicle sales, air traffic, steel consumption, and GST e-way bills indicate that the economy is on course for continued expansion, as highlighted in the Reserve Bank of India’s (RBI) February 2025 Bulletin.

The central bank has forecast GDP growth at 6.7% in 2025-26, at the higher end of the government’s forecast of 6.3-6.8%.   The RBI bulletin also highlights improved industrial activity, reflected in the January PMI.

The Reserve Bank of India (RBI) in its monthly economic bulletin for February, highlighted that the Indian economy is set to gain momentum with rising rural demand and income tax relief announced in the Union Budget 2025, supporting urban consumption amid interest rate cuts. According to the RBI’s economic activity index (EAI), which tracks 27 high-frequency economic indicators, momentum in the economy is likely to be sustained moving forward. For 2025-26, the central bank has forecast GDP growth of 6.7%, placing it at the upper end of the government’s projected range of 6.3-6.8%.

The Indian economy is expected to grow at its slowest pace in four years in 2024-25, following a decline in GDP growth to 5.4% in the July-September 2024 quarter from 6.7% in the previous quarter. However, high-frequency data and the central bank’s internal models indicate an improvement, with GDP growth rebounding to 6.6% in the January-March 2025 quarter. (High-frequency indicators include vehicles sales, air traffic, steel consumption and GST E-way bills.)

The bulletin noted that uncertainty in global trade and geopolitical landscape has impacted domestic equity markets, leading to declines in both benchmark and broader indices due to selling pressure from foreign portfolio investors (FPIs) amid weak investor sentiment. The Indian rupee, like other emerging market currencies, has depreciated under the pressure of a strong US dollar. The Indian rupee depreciated by 1.5% (m-o-m) in January. However, India’s robust macroeconomic fundamentals and improvements in key external sector indicators have helped the country navigate the current wave of global uncertainty.

Key Highlights in the RBI bulletin

Industrial activity, as per the bulletin, showed improvement over the previous quarter, as reflected in the rise of the Purchasing Managers’ Index (PMI) in January. A surge in tractor sales, increased fuel consumption, and steady growth in air passenger traffic further indicate a revival in overall economic momentum. 

Economic activity momentum is poised to be sustained. It said that strong rural demand is expected to receive a further fillip from the robust performance of the agriculture sector. Rural demand remains robust, driven by rising farm incomes. Notably, fast-moving consumer goods (FMCG) sales in rural areas grew by 9.9% in Q3:2024-25, significantly higher than the 5.7% recorded in Q2. 

The Urban demand has recovered, with 5% growth in Q3, nearly double the 2.6% seen in the previous quarter. The enterprise surveys conducted by the Reserve Bank corroborate this assessment. Urban demand is poised for a recovery, tracking decline in inflation as well as a boost to disposable incomes from the sizeable income tax relief announced in the Union Budget 2025-26.

The Union Budget 2025-26 measures aimed to fuel four engines of growth – agriculture, MSMEs, investment and exports – are expected to boost medium-term growth prospects of the Indian economy. The Budget focuses on stimulating consumption while ensuring quality expenditure. The effective capital expenditure-to-GDP ratio is projected to rise to 4.3% in 2025-26 from 4.1% in 2024-25 (RE).

Domestic demand is also expected to benefit from the repo rate cut by the MPC in its meeting on February 7, 2025. 

At its bi-monthly monetary policy meeting in February 2025, the Reserve Bank’s Monetary Policy Committee (MPC) reduced the policy repo rate by 25 basis points to 6.25%. This decision was driven by a favorable growth-inflation balance, creating room to support economic growth while maintaining focus on aligning inflation with the target. 

However, the MPC highlighted risks to the growth and inflation outlook, including heightened volatility in global financial markets, uncertainties in global trade policies, and adverse weather events. Given these factors, the committee voted to maintain a neutral stance, ensuring flexibility to adapt to evolving macroeconomic conditions.

The RBI bulletin stated that listed non-government, non-financial companies experienced an acceleration in sales growth during Q3, supported by improved operating profit margins. 

On the investment front, private sector sentiment remained stable, with banks and financial institutions sanctioning nearly ₹1 lakh crore in project funding during Q3:2024-25. External commercial borrowings (ECBs) and Initial Public Offerings (IPOs) for capital expenditure also saw an uptick in the same period.

In the manufacturing sector, capacity utilization (CU) increased slightly to 74.2% in Q2:2024-25 from 74.0% in the previous quarter. However, seasonally adjusted CU declined by 110 basis points to 74.7%. Manufacturers remain optimistic about CU levels in the coming quarters.

Across all major sectors, businesses maintain a positive outlook on production, turnover, and overall economic conditions throughout Q2:2025-26. As per the bulletin, the employment situation remains aligned with demand trends, further reinforcing the economic recovery.

Headline CPI inflation, the bulletin noted, has eased to a five-month low of 4.3% in January 2025, driven by a sharp decline in food prices, particularly vegetables, as winter crops entered the market. Meanwhile, core inflation (CPI excluding food and fuel) has been gradually rising since May 2024 but remains below 4%.