“Strong macroeconomic fundamentals, along with improvements in various measures of external sector vulnerability, have helped India tide over the ongoing wave of global uncertainty,” the report penned by central bank economists said.
High frequency indicators like vehicle sales, air traffic, steel consumption and GST e-way bills point towards a sequential pickup in momentum of economic activity during the second half of the fiscal 2024-25 and sustain moving forward, they said.
Industrial activity has improved over the previous quarter, while rural demand sustained, buoyed by increasing farm incomes.
RBI maintains that the views expressed in the monthly report are of the authors and not of the central bank. While showing confidence over the Indian economy, they expressed concerns over the impact of the likely reciprocal tariffs by the US and others.”The US trade policy uncertainty has spiked to levels last seen during the 2019 episode of US-China trade war and restrictive trade policies and fragmentation could lead to a long term shift in global trade patterns rather than a short term disruption, and upward pressures on consumer and business costs,” the central bank researchers observed. A World Economic Forum report in January stated that Donald Trump’s threatened tariffs are projected to damage the economies of the US, Canada, Mexico and China.
“These policies could stoke inflation, engender tighter financial conditions, and heighten market turbulence,” the RBI report said, adding: “In this challenging and increasingly uncertain global environment, the Indian economy is poised to sustain its position as the fastest growing major economy during 2025-26 as per the estimates of major multilateral agencies.”
The uncertainty along with volatility in energy prices and adverse weather events however pose upside risks to India’s inflation trajectory. Meanwhile, robust kharif production and better rabi sowing, coupled with higher reservoir levels and seasonal winter correction in vegetable prices, augur well for food inflation going forward.
The country’s headline inflation, measured by Consumer Price Index, eased to a five-month low of 4.3% in January from 5.22% in December, helped by deceleration in food inflation to 5.7% from 7.7%.
There is expectation that rural demand would grow and urban demand would recover, tracking decline in inflation as well as a boost to disposable incomes from the sizable income tax relief announced in the Union Budget.
The global growth and trade outlook, however, faces downside risks from the evolving US tariffs, the timing and magnitude of which remain highly uncertain.
The financial markets remain on edge on the slowing pace of disinflation and the potential impact of tariffs which potentially require central banks to recalibrate policies, the RBI report noted.
“A strong dollar, driven by US economic resilience and trade policy pivots, could exacerbate capital outflows from emerging economies, push risk premiums higher, and intensify external vulnerabilities.”
Content Source: economictimes.indiatimes.com