According to an article on 'State of the Economy' in RBI's February bulletin, frequency indicators like steel consumption, vehicle sales, GST E-way bills, and air traffic suggest a gradual pickup in economic activity momentum in the second half of fiscal 2024-25 and are expected to continue. The article also mentions that a strong dollar, driven by the resilience of the US economy and movements in its trade policy may increase capital outflows from emerging countries, increase risk premiums, and aggravate external vulnerabilities.
The strong performance of the agricultural sector has boosted rural demand, and this economic momentum is expected to continue. Urban demand should also rebound as inflation eases and disposable incomes rise due to the significantly increased income tax relief provisions in the Union Budget 2025-26.
The momentum of economic activity is sustained and could even strengthen because of the good performance of the agriculture sector, which is expected to boost strong rural demand further. Urban consumption is also set to recover, tracking the reduction in the inflation rate and, at the same time, an improvement in disposable incomes due to significant income tax relief announced in the Union Budget 2025-26. "High-frequency indicators point towards a sequential pick-up in momentum of economic activity during H2:2024-25, which is likely to sustain moving forward," it said.
The Reserve Bank of India (RBI) clarified that the opinions expressed in the article are those of the authors and do not reflect the official position of the central bank. The authors pointed out that the budget measures focused on growth through agriculture, MSMEs, investment, and exports are envisaged to enhance India's medium-term economic outlook. They further stated that the Union Budget 2025-26 successfully strikes a balance between fiscal consolidation and growth objectives while laying a strong emphasis on capital expenditure, measures to support consumption, and a clear plan towards debt consolidation.
Robust domestic demand is expected to be supported by further easing of the repo rate, following the Monetary Policy Committee (MPC) decision on February 7, 2025. The article also highlighted the increase in public sector banks (PSB) share in transaction volumes during January 2025 in comparison to last year. Additionally, technical failures per 10,000 UPI transactions decreased across nearly all bank categories in January 2025 compared to January 2024, indicating banking systems getting more efficient in handling rising transaction volumes.
At the very outset, external happenings and a strengthening US dollar added their weight to the postulation of EME currencies in the year January 2025. The Indian rupee (INR) declined by 1.5% month-on-month and thus continued to follow a similar pattern with major global currencies. Nevertheless, the article points out that heavy market volatility notwithstanding, the INR, in comparison, was not very much disturbed.
