India’s GDP is projected to grow 6.8% in the second quarter of 2024-25, marginally higher than the 6.7% uptick in the first quarter (Q1), as per an economic activity index compiled by the Reserve Bank of India (RBI) based on a range of high frequency indicators that was cited by its officials in an article on Monday.

The article on the “State of the Economy” in the central bank’s October Bulletin noted that while India’s growth outlook is supported by robust domestic engines despite recent geopolitical tensions, some high frequency indicators have shown a slackening of momentum in Q2. This slackening was partly attributable to idiosyncratic factors like unusually heavy rains in August and September, and Pitru Paksha, the RBI officials led by Deputy Governor Michael Debabrata Patra said in the article.

Some of the indicators that have waned include goods and services tax (GST) collections, automobile sales, bank credit growth, merchandise exports and the manufacturing purchasing managers’ index (PMI), the article indicated. “The Indian economy has exhibited marked resilience in spite of a sequential ebb in momentum in the second quarter of 2024-25 on account of a host of factors…” the article said, but pointed to a sequential improvement in consumer perceptions about the current situation and future expectations and continued optimism among industry players about future growth prospects.  “Supply chain pressures eased in September, falling below historical average levels, although they remain vulnerable to geopolitical risks which have escalated in October. Our economic activity index (EAI) 26, based on a range of high frequency indicators, projects GDP growth at 6.8% in Q2:2024-25,” the article concluded.

“Looking ahead, private investment is showing some encouraging signs in terms of lead indicators while consumption spending is shaping up for a festival season revival,” the article said, having pointed to a positive outlook among manufacturers about capacity utilisation in the ensuing quarters. 

The article, however, flagged concerns around stretched valuations in Indian stock markets and the uncertainty surrounding geopolitical conflicts in the Middle East, which got reflected in the pullback in key indices witnessed in October. “Markets are likely to tread cautiously with an eye on corporate earnings reports for Q2FY25 and trends in global markets,” they added.

Inflation outlook

Inflation, which had stayed below the central bank’s median target of 4% for two consecutive months through July and August, surged in September as an adverse statistical base effect was compounded by a resurgence in food price momentum, the article noted. While the sharp pick up in retail inflation last month, to 5.5%, was driven by the food group, they noted that core inflation also registered an uptick along with a narrowing of the deflation in fuel prices.

“Food price pressures in respect of vegetables could turn out to be transitory with robust kharif harvest arrivals, although the surge in the price momentum of oils and fats can have second order effects impacting overall inflation through input costs of fast moving consumer goods (FMCGs),” the RBI officials averred. 

Food price data till October 17 indicate a softening in prices of cereals and pulses (except gram dal) but edible oils continued to harden after import duties were hike 20 percentage points in September, while onions and tomato prices have risen steeply.

Amid the heightened geopolitical tensions in the Middle East, net importer countries face the pass-through risk of increase in commodity prices, especially of crude oil and metals. “The future course of monetary policy the world over would, therefore have to take into account the risks to both growth and inflation from recent commodity price shocks,” they said.