Monsoon-driven rural demand surge set to ignite private investment: RBI

Following a slow first quarter in 2024-25, demand conditions are beginning to pick up, and rural demand is set to increase, driven by better monsoon conditions, along with a rise in urban demand, which is anticipated to stimulate private sector investments, according to the latest RBI bulletin, 'State of the Economy'.

The RBI noted that rural savings are also on the rise, as evidenced by an increase in both the number of savings accounts and their balances. It also highlighted that declining inflation is a key factor in the resurgence of rural spending, helping it catch up with urban consumption levels. “The average rural consumer is getting increasingly price conscious. Reflecting these forces of turnaround,” it states.

The bulletin highlights that rising rural incomes are fuelling growth in fast-moving consumer goods (FMCG). As inflation pressures ease, FMCG companies are beginning to see signs of recovery, indicating a potential shift in the market. "Price stability, combined with expectations of a good monsoon and increased government spending in rural areas, is driving volume growth. Early indicators of new capacity creation and a rise in investment intentions in certain industries have already emerged."

The apex bank states that business sentiment is also improving, as reflected in the rising business confidence index by the National Council of Applied Economic Research (NCAER), with more polled firms expecting better economic conditions in the next six months. Additionally, Indian companies are experiencing a revival in overseas fundraising, supported by increased interest from international investors, better liquidity conditions, and lower hedging costs.

Banks and non-banking financial companies (NBFCs) are diversifying their funding sources, particularly through bond issuances abroad, to meet the growing demand for corporate funding, says the RBI report. "The offshore syndicated loan market is becoming increasingly attractive for corporates, anticipating an imminent rate-cut cycle, leading to large issuances from existing borrowers and new entrants," it adds.

The move towards raising funds in overseas markets highlights the evolving dynamics of domestic credit markets, says the RBI. "Banks are planning to raise approximately ₹40,000 crore in equity funds, including through qualified institutional placements, during the second half of the current financial year to strengthen their balance sheets and support capital expansion."

The report states that business services like consulting, engineering, research, and design are quickly emerging as India's leading export sector, outpacing software and information technology. They also encompass advertising, public relations, logistics, accounting, auditing, architectural, and legal services, it adds.

Additionally, logistics in India are advancing due to strategic infrastructure development and technological upgrades in ports and shipping, finds the RBI report. "Port development is enhancing cargo handling capacity and connectivity. RFID-based port access control is improving security and efficiency, while public-private partnerships are contributing to growth. Out of the 166 projects started at major ports under the Sagarmala program, 90 have been completed, increasing capacity by over 230 million tonnes per year," it adds.