The Reserve Bank of India (RBI) has retained its growth forecast for the Indian economy at 7.2% for FY25, as outlined in the recent Monetary Policy Committee (MPC) meeting. While the RBI moderated its outlook for the second quarter of the fiscal year, expectations for growth in the third and fourth quarters of FY25, as well as the first quarter of FY26, were revised upward. RBI Governor Shaktikanta Das highlighted the resilience of India's growth, driven by rising private consumption and investment demand.

Das emphasized the country's strong economic fundamentals, stating that private consumption, the primary driver of aggregate demand, is expected to remain buoyant due to an improved agricultural outlook and growing rural demand. The services sector is also anticipated to contribute to robust urban demand. Additionally, government expenditure at both central and state levels is forecasted to gain momentum, aligning with Budget Estimates for the fiscal year.

In the revised outlook, the RBI has adjusted the growth forecast for the second quarter of FY25 to 7%, down from the previous estimate of 7.2%. However, the third and fourth quarters are projected to show stronger performance, with growth rates expected at 7.4% (up from 7.3%) and 7.3% (up from 7.2%), respectively. For the first quarter of FY26, the forecast has also been raised to 7.3%. These adjustments reflect the RBI’s confidence in sustained economic momentum despite temporary challenges.

India's growth rate for FY24 stood at 8.2%, underscoring the economy's resilience. The country’s economic prospects are underpinned by favorable conditions in the agricultural sector, rising rural incomes, and sustained demand across key sectors.

Monetary Policy Focus on Inflation Control

In the latest monetary policy decision, the MPC kept the repo rate unchanged at 6.5%, shifting its stance from ‘withdrawal of accommodation’ to a more neutral policy stance. This decision was supported by 5 of the 6 committee members, while all members unanimously endorsed the policy stance shift. The change in the RBI’s stance indicates a more balanced approach between promoting growth and addressing inflation risks.

Governor Das noted that domestic growth has been resilient, with both private consumption and investment showing strong progress. He stressed that the solid growth backdrop enables the RBI to focus on ensuring a sustainable decline in inflation toward the central bank's 4% target.

While headline inflation has been on a downward trajectory, Das warned that its pace has been uneven and slower than anticipated. The RBI expects inflation moderation to reverse temporarily in September due to adverse base effects and other factors. Nevertheless, inflation is forecasted to remain elevated in the near term, with the RBI maintaining vigilance over potential risks to price stability.

Fiscal and Demand Drivers

The RBI pointed to several key drivers supporting India's growth story:

Private consumption: Growth in rural and urban demand, bolstered by improving agricultural conditions and services sector activity.

Government expenditure: Higher spending at the central and state levels, which is expected to accelerate as per Budget Estimates.

Investment demand: Increasing private investment, reflecting broader economic optimism and favorable market conditions.

Das also highlighted that services sector growth would play a pivotal role in maintaining the upward momentum in urban demand. Meanwhile, rural demand is set to benefit from a favorable agricultural outlook, adding to the strength of private consumption.

In line with this robust growth forecast, the RBI remains committed to fiscal stability and will continue to monitor the evolving economic landscape closely. With inflationary pressures and macroeconomic balances in focus, the central bank's monetary policy aims to maintain the growth-inflation trade-off at a sustainable level.

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