Facing criticism from the government over the central bank prioritizing inflation over growth, the new RBI Governor Sanjay Malhotra said that prospects of the Indian economy are expected to improve on the back of high consumer and business confidence in 2025.
"As we work to build financial stability to support an even higher growth path for the Indian economy, our focus remains firm on keeping financial institutions stable and more broadly, on systemic stability," Malhotra said in foreword to the Financial Stability Report.
He further said that despite global uncertainties Indian economy is expected to pick up pace in the second half of the current financial year.
"Notwithstanding the uncertainties shrouding the global macro-financial ethos as it unfolds, prospects for the Indian economy are expected to improve after the slowdown in the pace of economic activity in the first half of 2024-25."
"Consumer and business confidence for the year ahead remain high and the investment scenario is brighter as corporations step into 2025 with robust balance sheets and high profitability," said Malhotra who took over as 26th Governor earlier this month.
Flagging the issue of growth moderation in the first half, the Finance Ministry in its November Monthly Economic Review had raised concern that the possibility that structural factors may also have contributed to the slowdown in H1 should not be ruled out.
India has witnessed a seven-quarter low GDP growth of 5.4 per cent for the second quarter ended September 2024. In the first half, GDP growth was at 6 per cent.
A slowdown in growth and moderation in inflation are building cases for RBI to cut its policy rate in the forthcoming Monetary Policy Committee meeting.
Malhotra further said that financial sector regulators in India too are intensifying reforms and sharpening their surveillance against the backdrop of the soundness of the financial system bolstered by robust earnings, low levels of impaired assets and strong capital buffers, as this report highlights.
Stress test results reveal that the capital levels of the banking system as well as that of the NBFCs sector will remain well above the regulatory minimum even in adverse stress scenarios, he said.
"We continue to secure and anchor public trust and confidence to support India's aspirational goals. We are committed to developing a modern financial system that is customer-centric, technologically leveraged, and financially inclusive," he said.
He said referring to the global economy, which shows resilience in the face of formidable headwinds from political and economic policy uncertainty, persisting conflicts, and an environment of fragmenting international trade and tariffs.
Brightening the global prospects is the likelihood that the decline in inflation will continue and align with targets during the year ahead, allowing purchasing power to recover, he said.
He further added that "As monetary policy gains headroom to further support economic activity, financial conditions are likely to stay easy and thereby contribute to an improving trend in global GDP as a prolonged period of low growth finally bottomed out" adding that the robust labor market and the sound financial system too provided congenial conditions for this turnaround.
But, he said, the medium-term outlook is still challenging with downside risks from possible intensification of geopolitical conflicts, sporadic financial market turmoil, extreme climate events, and increasing indebtedness.
Sustained stretched asset valuations, fragilities in the less regulated non-bank financial intermediaries, and threats from new and emerging technologies add to the evolving uncertain outlook, he added.
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