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The RBI bulletin notes that rural demand is expected to pick further, supported by the robust performance of the agriculture sector. Urban demand is also poised for a recovery, driven by a decline in inflation and a boost to disposable incomes following significant income tax relief in the Union Budget for 2025–26.
According to the RBI’s economic activity index (EAI), which tracks 27 high-frequency economic indicators, momentum in the economy is likely to be sustained moving forward.
“High-frequency indicators point towards a sequential pick-up in economic activity during H2 FY25,” the bulletin said, indicating that the recovery will continue in the medium term.
The RBI also highlighted that the global economy is growing at a moderate pace, with divergent growth prospects across countries. However, emerging market economies (EMEs), including India, are facing external vulnerabilities due to a strong US dollar.
The strength of the US dollar, driven by resilience in the US economy and shifting trade policies, is contributing to capital outflows from EMEs and pushing risk premiums higher. This could exacerbate currency depreciation pressures and increase external vulnerabilities for countries like India.
Despite these global risks, the RBI remains optimistic about India’s medium-term growth prospects. The Union Budget’s focus on fueling four key engines of growth—agriculture, MSMEs, investment, and exports—is expected to drive the economy forward. The budget aims to balance fiscal consolidation with growth objectives, prioritising capital expenditure (capex) while supporting consumption and offering a clear roadmap for debt consolidation.
Additionally, domestic demand is expected to benefit from the recent repo rate cut by the RBI’s Monetary Policy Committee (MPC) in February 2025, further supporting economic activity and growth.
Global risks and impact on Indian Economy
While the domestic outlook remains positive, global financial markets are on edge. Emerging market economies are facing increased selling pressures from foreign portfolio investors (FPIs) amid global uncertainties, with a strong US dollar contributing to currency depreciation.
In January 2025, the Indian rupee depreciated by 1.5% month-on-month, reflecting the broader trend in global currency movements. However, the RBI noted that the Indian rupee exhibited relatively low volatility compared to other currencies in a period of heightened market turbulence.
In terms of foreign capital inflows, FPI flows turned negative in January 2025, with net outflows of $6.7 billion, primarily driven by $8.4 billion in equity outflows. It signals growing “risk-off” sentiment among global investors amid escalating global uncertainties.
However, there’s positive news on the foreign direct investment (FDI) front. India saw a 20.6% year-on-year increase in gross inward FDI, reaching $62.5 billion during April-December 2024, signaling strong investor confidence in the country’s growth prospects.
