Prospects of economy expected to improve in 2025: RBI Governor

Facing criticism from the government over the central bank prioritising inflation over growth, the new RBI Governor Sanjay Malhotra on Monday said that prospects of the Indian economy are expected to improve on the back of high consumer and business confidence in 2025.

"As we strive to preserve financial stability to support a higher growth path for the Indian economy, our focus remains steadfast on maintaining the stability of financial institutions and, more broadly, systemic stability," Malhotra said in the foreword to the Financial Stability Report.

He further said that despite the global uncertainties Indian economy is expected to pick up pace in the second half of the current financial year.

"Notwithstanding the uncertainties shrouding the global macro-financial ethos as it unfolds, 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.

"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," said Malhotra who took over as 26th Governor earlier this month.

Flagging the issue of growth moderation in the first half, the Finance Ministry in its November Monthly Economic Review had raised concerns that the possibility that structural factors may also have contributed to the slowdown in H1 should not be ruled out.

India recorded a slowdown in GDP growth to a seven-quarter low of 5.4 per cent for the second quarter ended September 2024. For the first half, the GDP growth stood at 6 per cent.

The slowdown in growth and moderation in inflation are building a case for RBI to slash policy rates in its upcoming Monetary Policy Committee meeting.

Malhotra further said that financial sector regulators in India too are intensifying reforms and sharpening their surveillance against the backdrop of the soundness of the financial system bolstered by robust earnings, low levels of impaired assets and strong capital buffers, as this report highlights.

Stress test results reveal that capital levels of the banking system as well as of the Non-banking Financial Companies (NBFCs) sector will remain well above the regulatory minimum even under adverse stress scenarios, he said.

"We continue to secure and anchor public trust and confidence to support India’s aspirational goals. We remain committed to developing a modern financial system that is customer-centric, technologically leveraged and financially inclusive," he said.

Referring to the global economy, he said, it exhibits resilience in the face of formidable headwinds from political and economic policy uncertainty, persisting conflicts and an environment of fragmenting international trade and tariffs.

Brightening the global prospects is the likelihood that the decline in inflation will continue and align with targets during the year ahead, allowing purchasing power to recover, he said.

As monetary policy gains headroom to further support economic activity, financial conditions can be expected to remain easy and contribute to an improvement in the trajectory of global GDP from a prolonged phase of low growth, he said, adding, a robust labour market and sound financial system too provide congenial conditions for this turnaround.

However, he said, the medium-term outlook remains challenging, with downside risks from possible intensification of geopolitical conflicts, sporadic financial market turmoil, extreme climate events and rising indebtedness.

Stretched asset valuations, fragilities in the less regulated non-bank financial intermediaries, and threats from new and emerging technologies also add to the evolving uncertain outlook, he added.

(Except for the headline, this story has not been edited by Editorji News Desk and is published from a syndicated feed.)