GDP Growth: RBI pegs GDP growth at 7% in FY25 amid corporate investments

The Reserve Bank of India (RBI) has said the economy will expand at 7% in FY25, at world-leading rates for the second straight year running, as corporate investments follow state-led capital expenditure in boosting demand across sectors in the world’s most populous country.

The optimism also led the central bank to revise the quarterly GDP projections upward. “The momentum of economic activity witnessed during 2023-24 is expected to continue in the next year,” RBI governor Shaktikanta Das said Thursday after announcing a status quo on policy rates.

The real GDP is expected to climb 7.3% in FY24, as per the first advance estimates by the national statistics office. On inflation, RBI projected the consumer price index at 5.4% for FY24 and a fall to 4.5% in FY25, assuming a normal monsoon next year.

However, large and repetitive food price shocks are interrupting the pace of moderation in the consumer price index (CPI), forcing the central bank to continue with the withdrawal of accommodation, puncturing market expectations of a “neutral” stance.

Geopolitical tensions, volatility in international financial markets and geo-economic fragmentation will also pose risks to the growth and inflation outlook.

RBI Pegs GDP Growth at 7% in FY25 Amid Corp Investments

“Monetary policy, in the midst of these lingering uncertainties, has to remain vigilant to ensure that we successfully navigate the last mile of disinflation. Stable and low inflation at 4% will provide the necessary bedrock for sustainable economic growth,” Das said. He also observed that the transmission of the 250-basis-point rate since May 2022 is still not complete. One basis point is a hundredth of a percentage point.

“One feels that the case for a change in policy stance to “neutral” from the current “withdrawal of accommodation” is stronger now. While that did not take place in February, the expectations of a change in the policy stance will likely be strong in the coming meetings,” said Siddhartha Sanyal, chief economist at Bandhan Bank. “If the RBI’s CPI forecasts come true, clarity about headline CPI inflation softening to a 4%-handle should emerge by Q2 of FY25 – it should offer the MPC the flexibility to cut the repo rate and maintain a real interest rate that is better aligned with their long term policy objective,” he said.

As far as the quarterly GDP projections go, the RBI expects a 7.2% print in the first quarter of the next fiscal, revised upwards from earlier projection of 6.7%, second quarter growth at 6.8% against 6.5%, third quarter growth at 7% from 6.4%. The fourth quarter growth is projected for the first time at 6.9%.

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