RBI model pegs FY25 GDP growth at 6%, lower than official view of 6.5%

India's economic growth is expected to moderate to 6% in FY 2024-25, while retail inflation may ease to 4.8%, the data based on the Reserve Bank of India’s (RBI) statistical model shows.

As per the RBI's latest 'State of the Economy' report for December 2023, the economic growth for 2023-24 is projected at 7.1%, followed by a relatively "slower and uneven" expansion of 6% during 2024-25.

The GDP projections of the RBI's statistical model for FY25 are 50 basis points lower than estimates of the RBI's monetary policy committee (MPC), which in October 2023 said the economy could grow at 6.5% in FY 2024-25.

When it comes to CPI inflation, the report says a moderation is expected after Q3 FY24, with annual retail inflation averaging 5.3% in FY24 and further expectations of easing to 4.8% in FY25.

India's economy had recorded 7.2% GDP growth in FY23, lower than 9.1% in FY22. Nevertheless, despite moderating growth each year, the country is among the fastest-growing economies in the world.

"There are both favourable demand-side drivers and easing of supply-side constraints at work," the report says, adding that GDP is expected to sustain momentum alongside moderation in inflation, despite global headwinds.

In the second quarter of FY24, India grew at 7.6% YoY, slightly lower than 7.8% in the previous Q1 FY24 quarter and up from 6.2% in Q2 FY23. The stronger-than-expected growth in Q2 was driven by driven by investment and government consumption.

In Q3 FY24, two-thirds of rabi sowing has already been completed despite the late harvest of kharif crops in some states. The manufacturing sector gained strength with easing input cost pressures and a pick-up in demand. Eight core industries also recorded healthy growth in October and continued high growth since June this year.

The purchasing managers’ index, the services sector buoyancy, and the GST collections -- all have shown expansion.

On the demand side, household consumption, FMCG sales, and other indicators have also seen strong growth. "Taking all these factors into consideration, real GDP growth for 2023-24 is projected at 7.0 per cent with Q3 at 6.5 per cent; and Q4 at 6.0 per cent. Real GDP growth for Q1:2024-25 is projected at 6.7 per cent; Q2 at 6.5 per cent; and Q3 at 6.4 per cent. The risks are evenly balanced," says the RBI report.

As part of the suite of models for informing monetary policy formulation, the RBI has developed a dynamic stochastic general equilibrium (DSGE) model that is based on microeconomic foundations and rational expectations characterising the choices of agents such as the representative consumer, producer and the central bank.

Notably, despite global headwinds, the Indian economy is one of the fast growing economies in the world. The International Monetary Fund (IMF) has called India one of the "star performers" that's estimated to contribute 16% to the global growth in 2023-24.

Nada Choueiri, the mission of India at IMF, this week appreciated India's "very robust rate" of growth, saying when compared to peer countries, India is "one of the star performers".