Key Highlights of the RBI Economic Outlook for 2024

The Reserve Bank of India’s (RBI) economic forecast for 2024 discusses in length about the strengths and challenges faced by the Indian economy. The economic analysis by the RBI gives a snapshot of the economy – including the sources of growth and inflation and forecasts for the upcoming quarters.

In its latest issue, the central bank remained wary of the challenges present in the global economy such as geopolitical issues, policy divergence etc., but appraised the performance of the Indian economy. Let’s delve into the most important pointers from the RBI’s economic review.

Summary of the Indian Economy Outlook by RBI: MPC Report

• The Indian economy performed well despite several critical challenges in the global economy in the past few quarters. This reflects stability in domestic macroeconomic conditions and strengthens the future growth outlook.
• The rise in private investment and business optimism is leading to the assumption of a rise in consumer spending, supported by festival demand growth. Further, rural demand is expected to benefit from an improved agricultural outlook despite a surge in inflation in recent months.
• Higher than usual rainfall during the monsoon season improved the prospects for the kharif crop, although there remains a risk of excessive rainfall damaging standing crops. The monsoon bodes well for reservoir storage and for the rabi season crop outlook.
• Overall, it expects domestic demand to improve in the quarters ahead on the back of higher consumer spending, business confidence and private investment. Additionally, the govt’s. continued emphasis on capital expenditure is seen adding strength to the investment outlook which bodes well for demand outlook.

Breaking down the GDP Growth Projections by RBI

The gross domestic product (GDP) growth projections by RBI helps in understanding the performance of key sectors and predict the future outlook. The baseline projections of growth and inflation are conditional on the assumption of a few key variables such as: global GDP growth, crude oil prices, and dollar exchange rate. Here’s the summary of what the RBI thinks about future path of the Indian economy:

• The real GDP growth forecast for fiscal year 2024-2025 was kept at 7.2 %. In Q1, the GDP growth registered at 6.7% supported by higher consumer spending which added 63% of the total GDP growth.
• The next fiscal year is expected to show a normal growth although not as high as what we saw in the preceding years. The GDP forecasts for the next fiscal year 2025-2026 was kept at 7.1, with major support from domestic consumption, investment, and business optimism.
• The GDP projection growth made by the RBI signifies the expectations held by the central bank that growth will be broad in its nature and come through both spending by consumers and investment by the private sector, while also facing pressures from inflation and uncertainty in the global market.

Future Outlook of Inflation: Forecast by RBI

The headline inflation is measured using the consumer price index (CPI). The MPC report notes that during H1 '24 (first half of 2024), inflationary pressures were moderate, with some pressure from food and vegetable prices inflation. Inflation control is central to the RBI’s monetary policy strategy and The inflation forecast by the RBI not only creates a floor for monetary policy actions but also underlines the expectation of price increases in the period ahead. Here’s primer on the inflation outlook:

• The headline inflation (CPI) rate is forecast to average at 4.2% YoY in the fiscal year 2024-25. The increase in raw materials costs is expected to continue in the months ahead and can have a negative impact on manufacturing firms earnings.
• The headline inflation rate is expected at 4.1% for the next fiscal year (2025-26), with Q1 growth projected at 7.3% percent, assuming favourable weather and no significant external shocks and risks to both growth and inflation remain evenly balanced.
• Overall, the inflation projections are in line with the central bank's long-term target inflation rate of around 4%. However, the central bank remains cautious about the potential effects of rising food prices, supply chain issues, and other external shocks.

RBI Growth Predictions for Key Drivers of the Economy:

The economic trends and RBI reports identified private consumption expenditure and investments as a key driver of economic growth and also the cornerstone of overall demand in India. There are several factors contributing to a positive outlook in variables. The RBI's optimism stems from multiple factors such as:

• Agricultural Prospects: The typical monsoon season portends positively for agricultural output, particularly during the kharif crop season. It is anticipated that this will raise rural residents' incomes and stimulate demand for consumer items. Rural expenditure is probably going to rise as a result of increasing demand and greater income levels.
• Aggregate Demand: Due to higher spending throughout the festival season, domestic consumption is anticipated to be stimulated. Short-term economic development will be fuelled by this seasonal boost, which will improve retail sales and services.
• Global Trade Rebound: The MPC report forecasts global trade growth to rebound to 3.1% in 2024 from 0.8% in 2023. The rise in world trade can benefit Indian exports and reduce the country’s fiscal deficit. Higher external demand can complement domestic consumption and investment and result in a more balanced growth.
• Government Spending: It is anticipated that capital expenditures will rise owing to a rise in federal and state government spending in accordance with budgetary allotments. This could stimulate private sector investment and infrastructure development.
• Private Investment: The financial stability of firms and banks is supporting investment activity and this momentum is expected to strengthen further and stimulate economic growth.
• Business Optimism: Increasing business confidence, driven by improved economic indicators and government policies favouring investment, is likely to encourage more private sector investments. This optimism is reflected in various lead indicators that suggest a potential uptick in capital spending.

The RBI’s view on market conditions underscores a cautious optimism, noting that while India has strong fundamentals, it is not immune to global disruptions. As part of its economic analysis, the RBI identifies the potential risks from global macroeconomic conditions, exchange rate volatility, and geopolitical uncertainties which may spillover to emerging economies like India and hinder growth prospects.