India GDP Growth Projected at 6% for FY25 Amid Economic Resilience

The Reserve Bank of India (RBI) released its “state of the economy” report on Wednesday, projecting a real GDP growth of 6% for the fiscal year 2025. This estimate is lower than the 6.5% forecast in the October Monetary Policy Committee report. The review also revised the expected growth rate for fiscal year 2024 from 6.5% to 7%. The report suggests that despite global headwinds, the Indian economy is expected to sustain momentum alongside a moderation in inflation.

The GDP growth forecast takes into account assumptions such as global GDP growth of 2.6% in fiscal year 2024 and 2.1% in fiscal year 2025. Additionally, global Consumer Price Index (CPI) inflation is projected to be 5.5% in fiscal year 2024 and 4% in fiscal year 2025. The forecasts assume an unchanged RBI policy repo rate and a US Fed funds rate at 6.5% in fiscal year 2024 and 5.5% in the next fiscal year.

What does the Report say about India?

The report anticipates a phase of high growth in the first half of fiscal year 2023-24, followed by a moderation in subsequent quarters. Despite the moderation, the Indian economy is expected to maintain momentum, driven by favorable demand-side drivers and the easing of supply-side constraints.

Regarding the banking sector, the report notes that aggregate deposits in banks increased by 12.2% YoY as of December 1, higher than the 9.3% growth a year ago. Credit growth, excluding the impact of the HDFC twins merger, moderated from 17.5% a year ago to 16.4% as of December 1. The report highlights that the 250-bps repo rate hike by the RBI MPC is still working its way through the credit markets.

During the period from May 2022 to October 2023, the weighted average lending rate (WALR) on fresh rupee loans increased by 199 basis points (bps), including an 18 bps increase since April 2023. The WALR on outstanding rupee loans increased by 112 bps during the same period. On the deposit side, the weighted average domestic term deposit rates (WADTDRs) on fresh and outstanding deposits increased by 228 bps and 172 bps, respectively. While the WADTDR on fresh deposits declined in recent months, rates on outstanding term deposits continued to increase with the repricing of term deposits.

The report acknowledges that deposit growth, which surged in the wake of the withdrawal of INR 2000 banknotes, has now stabilized. The incremental credit-deposit ratio rose above 100% during June 2022-May 2023 but has been declining thereafter, reflecting the surge in deposit mobilization.

Overall, the state of the economy report provides insights into the current economic landscape in India, emphasizing factors such as GDP growth, inflation, and developments in the banking sector. The projections and observations offer valuable information for policymakers, businesses, and investors as they navigate the evolving economic conditions in the country.