Monetary policy stance may have led to demand slowdown in H1: Finmin review

A combination of monetary policy stance and macroprudential measures undertaken by the Reserve Bank of India (RBI) may have contributed to demand slowdown in the first half (April-September) of FY25, which among other factors led to lower economic growth, the finance ministry said in its latest monthly economic review. The November review said there are reasons to believe the outlook for growth in the second half would be better.

 

“The possibility that structural factors may also have contributed to the slowdown in H1 should not be ruled out. The combination of monetary policy stance and macroprudential measures by the central bank may have contributed to the demand slowdown. It is good news that the central bank lowered the cash reserve ratio from 4.5 per cent to 4 per cent in its policy meeting in December 2024. That should help boost credit growth, which has slowed a little too much and quickly in FY25,” the review said.  

 

 

India’s economic growth slowed more sharply than anticipated in the July-September period of FY25, dropping to a seven-quarter low of 5.4 per cent.The monthly review said the growth outlook for FY26 was bright from the point of view of Indian domestic economic fundamentals but also subject to fresh uncertainties.

 

The finance ministry also attributed the slowdown in GDP growth during the second quarter to a softening of public capex and private capex levels being affected by global uncertainties, excess capacity, and fears of dumping.

 

“Sustaining growth will require a deeper commitment from all economic stakeholders to growth,” the report added.

 

The review noted that 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 and this will weigh on the minds of monetary policymakers in emerging economies, including India.

 

Going forward, the review said that there are signs of capital formation growth rebounding early in H2 of FY25, with the Union government capex picking up pace.

 

“The order books of infrastructure and capital goods grew sharply in FY24 and H1 of FY25, indicating a pent-up investment impulse that will play out in the quarters ahead,” the monthly review said.

 

Going forward, the government expects the overseas inflows into India will gain momentum, driven by robust macroeconomic fundamentals, improved industrial output, and production-linked incentive (PLI) schemes that are likely to attract more foreign players despite ongoing geopolitical challenges.

 

 With a positive farm sector outlook, the government is hopeful that food price pressures will decline gradually. While the downward trend in international crude oil prices is a positive factor for domestic inflation, the review said that elevated global edible oil prices remain a risk.

 

The finance ministry added that India is strategically positioned to harness its rapidly growing AI ecosystem to attract additional investments and foster innovation at a time when investments in AI startups are increasing globally.