The Indian economy is recovering from the slowdown in momentum witnessed in the second quarter (Q2:July-September), with high frequency indicators (HFIs) for the third quarter (Q3: October-December) pointing towards this, said RBI staffers in the latest monthly bulletin.

This is driven by strong festival activity and a sustained upswing in rural demand. The prospects for agriculture and rural consumption are looking up with brisk expansion of rabi sowing, opined RBI staffers in an article “State of the Economy”.

Five buckets

HFIs include 17 indicators (which are broadly categorised into five buckets – soft, labour market, demand/sales, mobility, and payments) dealing with different segments of the economy.

Real GDP growth had moderated to a seven-quarter low of 5.4 per cent in Q2:FY25 as against 8.1 per cent in Q2:FY24 and 6.7 per cent in Q1 (April-June):FY25.

Based on RBI’s economic activity index, which indicates a pick-up in momentum in November on a seasonally adjusted basis, GDP growth nowcast for Q3:FY25 has been placed at 6.8 per cent. The index extracts the dynamic common factor underlying 27 monthly indicators representing industry, services, global and miscellaneous activities.

As per the projections based on RBI’s in-house Dynamic Stochastic General Equilibrium (DSGE), real GDP growth is likely to recover to 6.8 per cent and 6.5 per cent in Q3 and Q4 (January-February) of 2024-25, respectively.

Growth for 2025-26 is projected at 6.7 per cent while headline CPI (consumer price index-based) inflation is projected to average 3.8 per cent in 2025-26.

Headline (retail) inflation, as measured by year-on-year changes in the all-India consumer price index (CPI), fell to 5.5 per cent in November 2024 from 6.2 per cent in October 2024.

Growth trajectory poised to lift in H2

The authors observed that India’s growth trajectory is poised to lift in the second half (H2) of FY25, driven mainly by resilient domestic private consumption demand.

“Supported by record level foodgrains production, rural demand, in particular, is gaining momentum. Sustained government spending on infrastructure is expected to further stimulate economic activity and investment,” they said.

Global headwinds, however, pose risks to the evolving outlook for growth and inflation.

The RBI staffers said that global economy stands ready to enter 2025 with resilience as disinflation and monetary policy pivots gain traction, supported by recovering real incomes, steady labour markets, and a gradual revival in global trade.

Challenges, however, persist in the form of ongoing geopolitical tensions, concerns over growing protectionism and a large public debt overhang.

The staffers cautioned that these developments have adverse implications for emerging market economies (EMEs), with their currencies and equities vulnerable to the sharp bouts of declines seen in 2024 in a highly uncertain environment for trade and capital flows.