The RBI Bulletin (December 2024) states that high-frequency indicators (HFIs) for October and November 2024 show a mixed picture regarding India's economic activity:
A. October 2024:
- GDP Growth: The economic activity index shows a pick-up in momentum during October, suggesting that the slowdown in Q2 was bottoming out.
- Consumer Confidence: Consumer confidence indicators registered a sequential moderation.Amazon
- Supply Chain Pressures: Supply chain pressures remained below historical averages, showing some further easing.
- Inflation: Headline CPI inflation increased to 6.2 percent, exceeding the upper tolerance band, primarily driven by a sharp rise in food prices, although core inflation also increased.
B. November 2024:
- GDP Growth: Headline CPI inflation moderated to 5.5 percent, driven by easing food prices, suggesting continued economic recovery. Strong festival activity and a sustained upswing in rural demand fueled this recovery.
- Consumer Confidence: Consumer confidence remained above the neutral mark.
- Supply Chain Pressures: Supply chain pressures remained relatively low.
- Inflation: Headline CPI inflation decreased to 5.5 percent, driven by easing food prices and a favorable base effect. Core inflation also showed a modest increase.
- External Sector: Merchandise exports contracted, while imports grew significantly, widening the trade deficit.
I. Global Economic Context:
The global economy demonstrates resilience with moderate growth and decelerating inflation. However, this stability faces significant headwinds:
- Geopolitical Tensions: Conflicts and trade wars pose risks to global growth and price stability. The rise of protectionism could significantly disrupt trade and investment.
- Supply Chain Issues: While supply chains have shown improvement, geopolitical factors continue to introduce volatility. Commodity prices, while generally declining, show fluctuations in energy and food sectors. Food insecurity remains a major concern in low- and middle-income countries.
- Financial Markets: Markets display mixed signals. While stock markets have seen periods of growth, concerns remain regarding inflation, interest rate decisions by central banks, and the potential for recessions. The US dollar's strength impacts other currencies. The search for yield continues to drive investment choices.
II. Indian Economic Performance:
India's economic performance exhibits a mixed picture:
- Growth: GDP growth in Q2 (2024-25) was lower than anticipated, primarily due to a slowdown in private consumption and investment, and weak performance in manufacturing. However, high-frequency indicators suggest a rebound in Q3, driven by robust festive demand, a rise in rural demand and good agricultural prospects.
- Inflation: Headline CPI inflation moderated in November 2024 but remains above the upper tolerance band, primarily driven by food inflation. Core inflation also shows a modest increase. The RBI anticipates a decline in food inflation in Q4, though risks remain due to weather and international commodity prices.
- Aggregate Demand: Private consumption expenditure registered growth in Q2, driven by strong rural demand. Investment, however, remained weak. Net exports contributed positively to growth.
- External Sector: Merchandise exports contracted in November 2024, influenced by both negative momentum and an unfavourable base effect. Imports, however, registered a significant increase. The trade deficit widened substantially, driven by a surge in oil imports, although the share of oil in the total trade deficit decreased. Services exports continued to grow robustly. Foreign direct investment (FDI) inflows decelerated during the period, though they remain significant. Foreign portfolio investments (FPI) were largely negative in the earlier part of the period, though they turned positive in December.
- Financial Sector: System liquidity remained largely in surplus in the second half of November and early December. The Reserve Bank used open market operations to manage liquidity. Interest rates showed upward pressure.
III. Monetary Policy Decisions:
The MPC decided to hold the policy repo rate steady at 6.50 percent. This decision reflects a cautious approach, balancing the need to address inflation while supporting sustainable growth. The CRR reduction aims at injecting additional liquidity into the system.
IV. Other Key Developments:
- Financial Inclusion: Initiatives to enhance access to credit for MSMEs and the agricultural sector, including the expansion of pre-approved credit lines via UPI, and improvements in digital payments.
- Financial Regulation: Measures to strengthen the financial system's resilience and address emerging risks, including enhancing cybersecurity, and implementing a new approach to identifying and addressing stressed assets in the banking system.
- FinTech and AI: Initiatives to leverage the potential of FinTech and Artificial Intelligence (AI), including the development of a framework for responsible AI in the financial sector.
