After slowdown in H1 FY2025, prospects of Indian economy to improve: RBI Governor Sanjay Malhotra

“Notwithstanding the uncertainties shrouding the global macrofinancial 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,” Malhotra wrote in the foreword of the Financial Stability Report (FSR) of the RBI, released on Monday.

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, Malhotra said in his first communique after taking over as the charge of RBI Governor on December 11.

Against an uncertain global backdrop, the Indian economy is exhibiting steady growth, underpinned by solid macroeconomic fundamentals and strong domestic growth drivers, the Financial Stability Report said.

Real GDP growth is expected to recover in Q3 and Q4 of 2024-25 supported by pick up in domestic drivers, mainly public consumption and investment, strong service exports and easy financial conditions, the report said.

As the RBI strives to preserve financial stability to support a higher growth path for the Indian economy, its focus remains steadfast on maintaining stability of financial institutions and, more broadly, systemic stability, Malhotra said.

“We continue to secure and anchor public trust and confidence to support India’s aspirational goals. We remain committed to developing a modern financial system that is customer-centric, technologically leveraged and financially inclusive,” the Governor said.

Financial sector regulators in the country 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.

The report showed that the asset quality of banks improved further, with their gross non-performing asset (GNPA) ratio declining to a 12-year low of 2.6 per cent in September 2024 net NPA ratio at around 0.6 per cent. As per the macro stress test, banks GNPA may rise to 3 per cent in March 2026 under the baseline scenario. In adverse scenarios, GNPAs may further increase to 5 per cent or 5.3 per cent.

“Stress test results reveal that capital levels of the banking system as well as of the non-banking financial companies (NBFCs) sector will remain well above the regulatory minimum even under adverse stress scenarios,” the Governor stated.

As per the stress test, the aggregate Capital to Risk-Weighted Assets Ratio (CRAR) of 46 major banks may fall from 16.6 per cent in September 2024 to 16.5 per cent by March 2026 under the baseline scenario. No bank would fall short of the minimum capital requirement of 9 per cent.

The FSR report said that vulnerabilities in the form of stretched equity valuations, pockets of stress in the microfinance and consumer credit segments and risks from external spillovers require close monitoring.

On the global economy, the RBI Governor said as monetary policy gains headroom to further support economic activity, financial conditions can be expected to remain easy and contribute to an improvement in the trajectory of global GDP from a prolonged phase of low growth.

The medium-term outlook, however, remains challenging, with downside risks from possible intensification of geopolitical conflicts, sporadic financial market turmoil, extreme climate events and rising indebtedness, he said.