08

On February 19, 2025, the Reserve Bank of India (RBI) released its monthly bulletin, providing insights into the state of the economy. The RBI stated, “The Indian economy is regaining its growth momentum, driven by a recovery in consumption demand and overall investment.” According to the economic activity index, the RBI projected GDP growth for the fourth quarter (Q4) of 2024-25 at 6.6%.

The RBI analyzed the state of the economy based on the following factors:

Aggregate Demand

Aggregate Supply

Inflation

Financial Conditions

Additionally, it examined global economic trends and payment systems. While the full report is available in the RBI bulletin, here we highlight key takeaways from each aspect.

1. Aggregate Demand

Aggregate demand rebounded following a slowdown in the first half of the year (H1). Automobile sales grew by 2.5% YoY in January after two months of contraction, while petroleum consumption expanded by 3.1% YoY.

Toll collections showed strong growth in both volume and value, with e-way bill growth surging to 23.1% in January. Employment in the organized manufacturing sector increased at a record pace, according to the PMI survey. Job creation in the service sector also strengthened.

Under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), demand for work rose for the third consecutive month, growing 14.4% YoY in January due to the end of rabi sowing.

Merchandise exports contracted by 2.4% YoY in January, primarily due to a decline in oil exports. However, from April to January 2024-25, exports increased by 1.4%, driven by growth in engineering goods, electronics, rice, and pharmaceuticals. Meanwhile, imports grew by 10.3% in January and by 7.4% over April-January 2024-25, fueled by higher demand for gold, petroleum, and electronics.

India’s merchandise trade deficit rose to $23 billion in January 2025 from $16.6 billion in January 2024. For April 2024 to January 2025, the trade deficit increased to $242 billion compared to $206.3 billion in the previous year.

The Union Budget 2025-26 reaffirmed the government’s commitment to

fiscal consolidation, setting the fiscal deficit target at 4.4% of GDP, down from 4.8% in 2024-25. The goal is to achieve a debt-to-GDP ratio of approxi-mately 50% by March 31, 2031, through gradual fiscal deficit reductions from 2026-27 onward.

2. Aggregate Supply

Business expectations for future services output fell to a three-month low, while manufacturing sector optimism improved.

Port traffic increased due to higher shipments of fertilizers, containerized goods, and other cargo, growing from 3.4% in December 2024 to 6.6% in January 2025. Cement production reached a nine-month high, expanding by 4% in December, while steel consumption in the construction sector surged 5.8% YoY in January.

High-frequency indicators for the services sector suggest sustained economic activity, with most metrics showing year-over-year growth.

3. Inflation

Headline inflation, measured by the all-India Consumer Price Index (CPI), declined to a five-month low, dropping from 5.2% in December 2024 to 4.3% in January 2025.

Food inflation eased to 5.7%, driven by moderation in cereal, egg, vegetable, and pulse prices. However, prices increased for oils and fats, fruits, sugar, non-alcoholic beverages, and prepared meals.

Fuel and light deflation deepened slightly to (-)1.4% in January 2025 from (-)1.3% in December 2024, mainly due to falling kerosene prices, while LPG prices remained stable. Core inflation rose marginally to 3.7% in January from 3.6% in December, with higher inflation in housing, household goods, transport, communication, and personal care.

Regionally, rural and urban inflation rates stood at 4.6% and 3.9%, respectively. Rice prices remained stable in February, while wheat prices continued to rise.

Input costs for manufacturing softened in January, but services sector selling price pressures increased. Household inflation expectations for the next three months and one year rose by 20 basis points (bps) and

10 bps, respectively.

4. Financial Conditions

A liquidity deficit has persisted since mid-December 2024 due to government cash balance build-ups from quarter-end tax outflows, GST payments, capital outflows, and currency leakage. To ensure adequate liquidity, the RBI introduced daily Variable Repo Rate (VRR) auctions from January 16, 2025.

To address liquidity tightness, the RBI implemented measures such as open market operations, USD/INR buy/sell swaps, and longer-term VRR on January 27, 2025. From January 16 to February 13, 2025, the daily average net injection through the Liquidity Adjustment Facility (LAF) was ₹1.92 lakh crore, surpassing the ₹1.6 lakh crore average recorded from mid-December to mid-January. Liquidity pressures eased slightly in early February due to RBI interventions and increased government expenditure.

As of February 7, 2025, India’s foreign exchange reserves stood at $638.3 billion, sufficient to cover 10.8 months of imports and 89.7% of the country’s outstanding external debt as of September 2024. Key reserve adequacy indicators suggest that forex reserves remain at sustainable levels.

Conclusion

The RBI bulletin indicates that India’s economic recovery is on track, with momentum expected to continue. With retail inflation at a five-month low in January 2025, the RBI anticipates further easing, particularly in food prices, supported by strong rabi and kharif production.

Despite global financial market volatility, uncertain energy prices, and adverse weather posing risks, India’s economic activity is expected to remain robust. Strong agricultural performance and income tax relief in the Union Budget 2025-26 are likely to drive rural and urban demand.

On February 7, 2025, the Monetary Policy Committee cut the repo rate. The RBI expects this move, combined with government support measures, to stimulate domestic demand. However, sustaining demand growth will require an increase in private consumption, which depends on inflationary pressures and consumer expectations.