RBI’s State of the Economy Report

Key Highlights

• Headline inflation has dropped significantly from above 6% in October 2023 to 3.6% in February 2024.
• Key contributors to this decline include:
  • Robust kharif production
  • Improved rabi sowing
  • Higher reservoir water levels
  • Seasonal correction in vegetable prices
• This moderation in inflation is expected to cushion the Indian economy against trade tensions and global economic volatility.

India’s External Sector Strengths

• Resilient services exports continue to perform well, remaining largely unaffected by global disruptions.
• Structural strengths such as:
  • Sound fiscal policies
  • A calibrated monetary framework
  • Strong digital transformation initiatives
    are expected to underpin long-term, sustainable economic growth.

Monetary Policy Outlook

• The RBI reduced the policy rate by 25 basis points to 6.26% in February 2024.
• According to an ET poll of economists, another 25 bps rate cut is expected in April, given the inflation moderation.

Global Economic Concerns

• US tariff policies under President Trump are creating global growth uncertainty.
• Rising tariffs may push up consumer prices, which could raise inflation risks globally and impact growth in both emerging and advanced economies.

Risks for India

• Emerging economies, including India, are poised for faster growth than advanced economies.
• However, risks include:
  • Capital outflows
  • Currency depreciation pressures
• Since October, foreign portfolio investors (FPIs) have withdrawn $29 billion from Indian stocks, marking the largest six-month outflow.

Indian Rupee and Capital Flows

• FDI inflows remained strong, growing 12.4% year-on-year to $67.7 billion during FY25 (April–January).
• However, net FDI dropped to $1.4 billion from $11.5 billion a year ago due to higher repatriation and increased outward FDI.
• Outward remittances under the Liberalised Remittance Scheme (LRS) rose to $2.8 billion in January from $2.3 billion in December.
• Despite rupee depreciation, the Real Effective Exchange Rate (REER) stood at 102.37 in February, indicating the rupee remains overvalued by 2.4%, though improving from the November REER of 108.14.

Inflation Control Key to Navigating Global Headwinds

• With inflation easing, India is better placed to tackle external risks like trade tensions, capital outflows, and global volatility.
• Sustained fiscal discipline, monetary stability, and digital advancements will continue to be pillars of India’s economic resilience.