New Delhi: Inflationary pressures are abating, led by steady core disinflation and deflation in fuel prices, but food inflation remains vulnerable to recurring supply shocks, the Reserve Bank of India has said in its annual report for 2023-24, adding that the outlook for the Indian economy in 2024-25 is brightening.

The supply shocks, however, are preventing a quicker alignment of headline inflation with the target, the central bank said.

“Fiscal consolidation is progressing along with an improvement in the quality of fiscal spending and adjustment,” the RBI said. “The external sector is gaining strength, with the narrowing of the current account deficit (CAD) and foreign exchange reserves rising to an all-time high. The financial sector is sound and vibrant, supporting double digit credit growth, backed by high capital adequacy, solid earnings and improvements in asset quality,” it added.

Against the backdrop of subdued global economic activity and multiple headwinds, the Indian economy expanded at a robust pace in 2023-24, with real GDP growth accelerating to 7.6 per cent from 7 per cent in the previous year—the third successive year of 7 per cent or above growth, it said.

With gross fixed capital formation (GFCF) accelerating to 10.2 per cent in 2023-24 from 6.6 per cent in 2022-23, investment was the major driver of domestic demand, buoyed by government spending on infrastructure. Growth in private consumption demand, on the other hand, stood at 3 per cent as against 6.8 per cent a year ago. Government consumption demand was also subdued tracking fiscal consolidation.

The services sector, with a share of over 63 per cent in gross value added or GVA, remained the mainstay of aggregate supply, with growth of 7.9 per cent in 2023-24. Construction activity accelerated to register double digit growth, benefiting from rising demand in the housing sector and the government’s thrust on infrastructure, the RBI report said.

Employment conditions improved, with the unemployment rate falling to its lowest level during 2023 (January-December). Both urban and rural regions recorded a decline in the unemployment rate, it said.

Scheduled commercial banks remained well-capitalized, maintaining capital adequacy above the regulatory minimum as at end-September 2023. Capital adequacy of non-banking financial companies or NBFCs too was comfortable and asset quality improved as at end-September 2023. The UPI platform achieved significant milestones, surpassing 13 billion transactions in a single month in March 2024.

The Union government’s impetus to growth-inducing capital spending is likely to be sustained in 2024-25 with more than half of borrowings directed towards financing of capital outlay, the RBI report said.