The Indian economy is expected to receive a much-needed boost, driven by an uptick in rural demand and government-announced tax relief that is likely to support urban consumption, according to the Reserve Bank of India’s (RBI) latest monthly bulletin.
Economic Growth Outlook
The central bank noted that urban demand is “poised for a recovery,” thanks to declining inflation and increased disposable income from the “sizeable” income tax relief introduced in the Union Budget 2025-26. This, coupled with the strong performance of the agriculture sector, is expected to bolster rural consumption.
Despite these positive indicators, India’s GDP growth has slowed to 5.4% in the July-September 2024 quarter from 6.7% in the previous quarter, marking the slowest expansion in four years. However, the RBI’s internal models suggest that growth may recover to 6.6% in the January-March quarter, aided by domestic demand and the recent repo rate cut by the Monetary Policy Committee. The central bank has forecast growth at 6.7% for the 2025-26 fiscal year, which aligns with the government’s projected range of 6.3%-6.8%.
The RBI expects inflation to ease to 4.2% in the next financial year but warns of persistent risks. Factors such as global financial market uncertainties, volatile energy prices, and adverse weather conditions could exert upward pressure on inflation. Additionally, a strong U.S. dollar and shifts in trade policies could lead to capital outflows from emerging economies, raising risk premiums and exposing India to external vulnerabilities.
Pros and Cons of the Economic Policies
On the positive side, the tax relief measures announced in the Union Budget are expected to increase disposable income, which in turn should boost urban consumption and economic activity. Rural demand is also likely to strengthen, supported by the robust performance of the agriculture sector. The recent repo rate cut by the RBI will lower borrowing costs for businesses and consumers, encouraging investment and spending. Additionally, if inflation continues to ease as projected, it will create a more stable economic environment, reducing financial pressures on households and businesses. The RBI’s optimistic growth projection of 6.7% suggests that economic momentum could improve in the coming months.
However, there are concerns that despite these measures, India’s GDP growth in 2024-25 will still be the slowest in four years. While inflation is expected to decline, external risks such as global financial instability, fluctuating energy prices, and unpredictable weather patterns could disrupt economic stability.
Capital outflows remain a significant challenge, as a stronger U.S. dollar and changing global trade policies could drive investors away from emerging markets, including India. Moreover, the benefits of tax relief and monetary policy changes may take time to materialise, meaning their immediate impact on economic growth could be limited.
While the RBI’s latest projections indicate positive momentum for the Indian economy, challenges remain. The government’s fiscal measures and monetary easing are expected to provide short-term relief, but global risks and domestic structural issues could pose hurdles in the long run. Policymakers will need to navigate these uncertainties carefully to ensure sustained economic growth.
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