The Indian economy is expected to improve after a recent slowdown in GDP growth, with consumer and business confidence remaining strong, according to Sanjay Malhotra, Governor of the Reserve Bank of India (RBI). In his first commentary since taking office earlier this month, Malhotra noted that despite uncertainties in the global economic environment, the Indian economy's prospects should improve after the slowdown in the first half of 2024-25.

GDP growth decelerated to 5.4% in the second quarter of the current financial year, below market expectations. However, consumer and business confidence for the year ahead remains high, and investment prospects are positive, with corporations entering 2025 with strong balance sheets and high profitability.

The RBI’s Financial Stability Report, published in December 2024, emphasized that while the economy had decelerated, structural growth drivers remain strong. Real GDP growth is expected to recover in the second half of 2024-25, supported by increased public consumption and investment, strong service exports, and favorable financial conditions.

The report also mentioned several downside risks, including sluggish industrial activity, especially in manufacturing, reduced urban demand, global spillovers, and protectionist trade and industrial policies. On inflation, the report noted that food price softness and base effects had brought the headline inflation rate down to 5.5% in November, though core inflation rose by 64 basis points since May 2024 to 3.7%. The disinflationary effects of a strong kharif harvest and positive rabi crop forecasts are expected to ease foodgrain prices, though rising extreme weather events could pose inflation risks.

Malhotra reiterated that the RBI's focus remains on maintaining the stability of financial institutions and ensuring systemic stability to foster higher economic growth. He emphasized the RBI's commitment to developing a modern, customer-centric, technology-driven, and financially inclusive financial system.

Regarding the Indian financial sector, Malhotra highlighted strong earnings, low impaired assets, and robust capital buffers, with stress test results showing that both the banking system and non-banking financial companies (NBFCs) will maintain capital levels above the regulatory minimum, even in adverse scenarios.

On global economic conditions, Malhotra noted the resilience of the global economy despite challenges such as political and economic uncertainties, conflicts, and fragmented international trade. While declining inflation has improved global prospects, the RBI Governor warned that medium-term risks, including intensified geopolitical conflicts, financial market disruptions, extreme climate events, and rising global debt, remain.

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