India’s economic growth is poised for a revival in 2025, supported by strong consumer and business confidence, Reserve Bank of India (RBI) Governor Sanjay Malhotra stated in his first comments on the growth outlook since assuming office earlier this month.
In the foreword to the bi-annual Financial Stability Report released Monday, Malhotra highlighted the optimism for India’s economic trajectory. “Prospects for the Indian economy are expected to improve after the slowdown in the pace of economic activity in the first half of 2024-25,” he said.
The RBI governor also spoke of the resilience of consumer and business sentiment, stating, “Consumer and business confidence for the year ahead remain high and the investment scenario is brighter as corporations step into 2025 with robust balance sheets and high profitability.”
The new RBI governor’s approach
Bureaucrat Malhotra’s appointment came as a surprise, announced just two days before he began his three-year term on December 11. Known for his bureaucratic career, Malhotra spoke of stability and growth in his first press briefing but refrained from offering specific guidance on monetary policy. His predecessor, Shaktikanta Das, maintained steady interest rates for nearly two years despite increasing pressure to cut rates. Analysts now anticipate that Malhotra may begin easing rates as early as February 2025.
The RBI’s revised growth forecast for the current fiscal year stands at 6.5%, a significant drop from the 8% recorded in the previous fiscal year ending March 2024. The slowdown in the past quarter was the weakest growth pace in nearly two years, prompting calls for measures to reinvigorate the economy.
Global and domestic headwinds
On the global front, Malhotra struck a cautiously optimistic tone in the Financial Stability report . He cited easing inflation and the potential for monetary policy flexibility as positive developments. However, he also warned of medium-term risks such as geopolitical tensions, financial market volatility, extreme climate events, and rising global debt levels.
The RBI said in the report that economic growth in the third and fourth quarters of the financial year is expected to recover “supported by pick up in domestic drivers, mainly public consumption and investment, strong service exports and easy financial conditions.”
For India’s economy, the recovery hinges on several factors aligning favorably. Rural consumption could see a boost from promising rabi prospects, aided by healthy reservoir levels and favorable monsoons, though winter conditions will be critical for a strong harvest. Urban demand is also expected to improve, with corporate profits projected to recover in 2025 due to a favorable base effect after muted growth in 2024.
Higher corporate profits are anticipated to spur urban wage growth, which could further drive consumption. Inflation, a persistent concern throughout 2024, is projected to ease to 4.8% in the coming year, potentially paving the way for lower interest rates and increased consumer spending.
Financial stability and growth
Malhotra reiterated the central bank’s focus on financial stability as a cornerstone for India’s economic growth. He noted that the financial sector remains robust, supported by strong capital buffers, low levels of impaired assets, and healthy earnings. Stress tests conducted by the RBI indicate that Indian banks and non-banking financial companies (NBFCs) are well-positioned to weather adverse scenarios, with capital adequacy ratios projected to remain above the regulatory minimum.
The banking system’s capital adequacy ratio is expected to hold at 16.5% in March 2026, compared to 16.6% in September 2024. However, the report flagged a potential rise in gross non-performing assets (NPAs), which are projected to increase to 3% by March 2026, up from 2.6% in September 2024. Rising indebtedness and stretched asset valuations are seen as key risks to asset quality.
Investment, a critical driver of economic growth, is also expected to gain momentum. Public investment, which had slowed during the general elections in 2024, is likely to pick up pace in 2025. Gross fixed capital formation, an indicator of investment demand, grew at a modest 5.4% in the second quarter of FY25. Experts suggest that increased public investment could act as a catalyst for private sector investments.
Despite these positive signals, uncertainties persist, particularly on the geopolitical front. The upcoming inauguration of Donald Trump as US President on January 20 has introduced a layer of unpredictability. Trump’s tariff threats have already prompted preemptive measures by the Indian government and industry, and the long-term implications remain to be seen.
