The Indian economy is demonstrating resilience and stability, with the gross domestic product (GDP) anticipated to grow by 6.6% in 2024-25. This growth is supported by an increase in rural consumption, a rise in government spending and investment, as well as robust services exports, according to a report released by the Reserve Bank of India (RBI) on Monday. The December 2024 edition of the Financial Stability Report (FSR) presents a comprehensive evaluation by the Sub-Committee of the Financial Stability and Development Council (FSDC) regarding the robustness of the Indian financial system and the potential risks to financial stability.
Key Highlights from the Report
- Fortified Bank Soundness: The stability of scheduled commercial banks (SCBs) has been enhanced due to strong profitability, a reduction in non-performing assets, and sufficient capital and liquidity buffers.
- High Returns: Return on assets (RoA) and return on equity (RoE) have reached decadal highs, while the gross non-performing asset (GNPA) ratio has decreased to a multi-year low.
- Stress Tests: Macro stress tests indicate that most SCBs maintain adequate capital buffers above the regulatory minimum threshold, even during adverse stress scenarios. These tests also affirm the resilience of mutual funds and clearing corporations.
- Real GDP Growth: The FSR noted that in the first half of 2024-25, real GDP growth (year-on-year) slowed to 6%, down from 8.2% and 8.1% in the first and second halves of 2023-24, respectively.
Future Projections
Despite this recent slowdown, the underlying structural growth drivers continue to remain strong. Real GDP growth is projected to recover in the third and fourth quarters of 2024-25, bolstered by a resurgence in domestic factors, including public consumption, investment, vigorous service exports, and conducive financial conditions, according to the RBI.
Inflation Insights
Regarding inflation, the report forecasts that the disinflationary impact of a plentiful kharif harvest and promising rabi crop prospects is expected to ease food grain prices. However, the increasing occurrence of extreme weather events poses risks to food inflation.
Additionally, ongoing geopolitical conflicts and geo-economic fragmentation could exert upward pressure on global supply chains and commodity prices.