Monetary policy, macroprudential measures may have contributed to slowdown; growth to pick up in H2

There has been, however, emergence of newer uncertainties for the upcoming financial year 2025-26, the Ministry said, pointing out that many major economies’ global uncertainties and aggressive policies threaten domestic growth. “Global trade growth is looking more uncertain than before. Elevated stock markets continue to pose a big risk. The strength of the US dollar and a rethink on the path of policy rates in the United States have put emerging market currencies under pressure. In turn, that will make monetary policymakers in these countries think more deeply about the path of policy rates. Recent exchange rate movements may have lowered their degrees of freedom. In sum, sustaining growth will require a deeper commitment from all economic stakeholders to growth,” it said.

The Ministry also said that the increase in borrowing costs for advanced countries and weakening of emerging market currencies against the US dollar will weigh on the minds of monetary policymakers in emerging economies including India. “…in recent days, reconsidering the path of policy rates in the United States by financial markets has caused long-term sovereign borrowing costs for advanced countries to increase, and emerging market currencies have weakened against the US dollar. This will weigh on the minds of monetary policymakers in emerging economies, India included. Therefore, India’s growth outlook in FY26 for the coming years is bright when viewed through the lens of Indian domestic economic fundamentals, but is also subject to fresh uncertainties,” it said.

These comments by the Finance Ministry come in the backdrop of India’s Gross Domestic Product (GDP) growth slowing to a near two-year low of 5.4 per cent in July-September. The Ministry, however, pointed out that the recent reduction in the cash reserve ratio (CRR) by the RBI to 4 per cent from 4.5 per cent in its policy meeting in December 2024 should help boost credit growth, which “has slowed a little too much and quickly in FY25”. The RBI has kept its key policy rate unchanged at 6.5 per cent since February 2023.

There are good reasons to believe that the outlook for growth in the second half (H2) of the ongoing financial year 2024-25 is better than what was seen in H1, the Ministry said. Inflation is projected to be 4.8 per cent for FY25 by the RBI, with Q3 at 5.7 per cent and Q4 at 4.5 per cent. “Inflationary pressures softened in November 2024, driven by lower food and core inflation. An influx of fresh produce in the market has moderated vegetable price pressures. Healthy progress in rabi sowing indicates a promising harvest that will help alleviate food inflation pressures. The downward trend in international crude oil prices is a positive factor for domestic inflation, while elevated global edible oil prices remain a risk…the farm sector outlook is optimistic, generating hopes that food price pressures will decline gradually,” the Ministry said.

Also, the conclusion of the monsoon season and the expected increase in government capital expenditure are also expected to support the cement, iron, steel, mining, and electricity sectors, the Ministry said. Industrial activity is likely to gain traction, the Ministry said, adding that the services sector continues to perform well.

On the demand side, rural demand remains resilient, the Ministry said, citing 23.2 per cent and 9.8 per cent growth in two & three-wheeler sales and domestic tractor sales, respectively, in October-November. Urban demand is picking up, with passenger vehicle sales registering year-on-year growth of 13.4 per cent in October-November and domestic air passenger traffic showing robust growth.