The Reserve Bank of India recently released its Financial Stability Report for December 2024, indicating a robust growth trajectory for the Indian economy in FY25. This report indicates that the growth rate for FY25 will be around 6.6%, painting a rosy picture of India’s Projected GDP Growth financial health, as the decline in NPAs and strong banking sector performance go hand-in-hand with stable macroeconomic conditions.
India’s Projected GDP Growth: Key Drivers of GDP Growth in FY25
Several structural and cyclical factors will drive the country to its projected FY25 GDP growth of 6.6%.
1. Revival in Rural Consumption
Rural spending is poised to grow, driven largely by enhanced agricultural outputs and more focused government action in the rural sector.
2. Increased Government Spending and Investments
Higher public expenditure, particularly on infrastructure, should trigger higher demand within the domestic economy through multiplier effects on employment and private sector investments.
3. Strong Services Exports
Indian services continue to be a bright spot, with increasing strength in IT services, consultancy, and other knowledge-based exports continuing to support the balance of payments as well as the overall GDP.
4. Declining NPAs
India’s financial sector has significantly improved its health; its gross non-performing asset (GNPA) ratio has reached a multiyear low. The improvement reflects better credit risk management and a more permissive economic environment.
5. Sufficient Capital Cushions
Macro stress tests done by the RBI reveal that most SCBs have enough capital cushions, even during stressful conditions.
India’s Projected GDP Growth: Key Findings in the Financial Stability Report
1. Banking Sector Strength
The report reveals that Scheduled Commercial Banks are attaining decade-high RoA and RoE. This profitability and capital adequacy reflect the resilience of the sector and its ability to absorb economic shocks.
2. Macro Stress Testing
The stress tests on banks, mutual funds, and clearing corporations prove their robustness. They do have sufficient buffers even at extreme stress levels, indicating that the Indian financial system is resilient.
3. Inflation Trends and Challenges
The FSR pointed to a moderation in food inflation on account of a good Kharif harvest and promising rabi crop prospects. However, severe weather conditions and geopolitical tensions cast a shadow over global commodity prices and supply chains.
India’s Projected GDP Growth: Growth Moderation in Early FY25
While the report is upbeat, it does note a moderation in year-over-year GDP growth to 6% in the first half of FY25. This is compared with the strong growth of 8.2% and 8.1% in the first and second halves of FY24, respectively.
The slowdown is, however, attributed to global economic uncertainties and inflationary pressures. The RBI expects the reverse of this trend in the second half of FY25 to be led by domestic consumption, public investments, and favorable financial conditions.
FAQs
1. The GDP growth for FY25?
The Reserve Bank of India expects a GDP growth rate of 6.6% for FY25, supported by strong domestic drivers and improved financial conditions.
2. What are the drivers of India’s economic growth?
The key drivers are a revival in rural consumption, increased public investments, robust services exports, declining NPAs, and adequate capital reserves in the banking sector.
3. How has the banking sector contributed to financial stability?
The soundness of the banking sector is supported by decade-high profitability metrics, reduced GNPA ratios, and adequate capital buffers even under stress conditions.
4. What are the challenges for the Indian economy in FY25?
The challenges include severe weather conditions, geopolitical tensions on the global supply chain, and moderating GDP growth in the first quarters of FY25.
5. How does the RBI view inflation trends in the near future?
The RBI expects food inflation to be moderate as there’s a good Kharif harvest and a promising rabi crop, but there are risks from external shocks and extreme weather conditions.
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