RBI Bulletin: India’s growth outlook steady despite Q2 slowdown; Festive season consumption set to surge

The Reserve Bank of India’s latest bulletin for the month of October points to slackening in economic growth momentum in the July-September quarter of the current fiscal year, but suggests this slowdown may be temporary.

While India’s second quarter GDP growth data is awaited at the end of November, RBI’s nowcasting model suggests growth may be at least 20 basis points slow than its projection of 7 percent for the period.

The bulletin shows that RBI’s economic activity index projects GDP growth at 6.8 percent in Q2 FY25, which is lower than the 7 percent growth projected by the Reserve Bank in its October  policy, where it lowered the forecast from 7.2 percent earlier to 7 percent.

“Our economic activity index (EAI), based on a range of high frequency indicators, projects GDP growth at 6.8 per cent in Q2:2024-25,” said an article on the “State of the Economy” in RBI’s latest bulletin. The article was authored by RBI deputy governor Michael Patra and other members of the institution as their view, and not of the institution.

Despite geopolitical uncertainties and a dip in momentum during the July- September quarter, the article said that India’s economic growth remains supported by strong domestic drivers.

“In spite of recent geopolitical tensions, India’s growth outlook is supported by robust domestic engines. Some high frequency indicators have, however, shown a slackening of momentum in the second quarter of 2024-25, partly attributable to idiosyncratic factors like unusually heavy rains in August and September, and Pitru Paksha – goods and services tax (GST) collections; automobile sales; bank credit growth; merchandise exports; and the manufacturing purchasing managers’ index (PMI).”

However, the RBI’s nowcast suggests that this slowdown is temporary, with expectations of a pickup in the coming months as festive season demand surges.

One of the most encouraging signs for the Indian economy is the anticipated revival in consumption, especially with the Dussehra-Diwali season on the horizon.

Also read: RBI reverses course, sells $6.49 bn in spot forex market in August, shows bulletin

“Consumption spending is shaping up for a festival season revival, especially in small towns and lower tier cities… Although initial e-commerce sales have been underwhelming, retailers are expecting a late season push. Consumer spending is expected to be about 25 per cent higher than during Dussehra- Diwali last year,” the article said.

It said discounts are driving buyer enthusiasm, despite elevated prices. The demand for electronics, home décor, jewellery, and wardrobe updates is expected to fuel a surge in spending across the board, as per the bulletin.

Packaged food companies are preparing for a significant uptick in demand, ramping up supply chains across both urban and rural regions. E-commerce platforms, while experiencing a slow start, are banking on a late-season push to meet the rising demand. Quick commerce (Q-COMM) platforms are reshaping consumer behavior, with more Indians now relying on fast delivery options for groceries and ready-to-eat meals.

“Q-COMM is changing Indian consumers’ behaviour: rather than reaching into the cupboard, they swipe an app; they prefer to make a trip to the front door than to a store. The mass end has remained soft while premiumisation is strong. With finance companies having expanded their reach, smaller towns and rural areas that are traditionally cash dominated are seeing a rise in credit-driven consumption, particularly two wheelers, electronics and smart phones. Q-COMM shoppers are becoming increasingly discerning, price conscious, and channel agnostic,” the bulletin article said.

Another bright spot is the rise in credit-driven consumption in smaller towns and rural areas. Traditionally cash-dominated regions are witnessing an increase in two-wheeler, smartphone, and electronics purchases, thanks to expanded access to consumer finance. Private banks, anticipating higher demand, have initiated a hiring spree, which further boosts consumer confidence, said the article.

While inflation ticked up to 5.5 percent in September, driven by rising food prices, these pressures are expected to ease with the winter harvest, showed the article. Retail credit growth has moderated as lenders adopt a cautious approach, particularly in unsecured loans, but innovations in the fintech sector continue to fuel demand for digital credit.

“Recent data suggest that credit card transactions volumes have slowed as lenders are adopting caution in view of risks flagged in unsecured loans. Incipient stress in the microfinance sector appears to have been driven by lenders’ drive to disburse loans rather than borrowers’ demand…Credit bureau data indicate that retail credit growth has moderated as lenders have tightened personal loan supply,” said the article.

Digitisation Trends & Payments Systems

“In India, digitalisation is poised on a self-propelling growth path,” said the bulletin. India’s FinTech ecosystem is thriving, with the number of registered FinTech startups surging from 2,100 in 2021 to 10,200 in 2024, a fivefold increase. A bulk of the personal loans under one lakh rupees were sourced through FinTechs in 2023-24, showed the report. In the first quarter of 2024-25, FinTech loan disbursals grew by 27 per cent year-on year (y-o-y), underscoring robust customer demand for digital credit, the article said.

Digital transactions continued advancing across various payment modes in September 2024, said the article. The Real Time Gross Settlement (RTGS) reached Rs 177.8 lakh crore during the month–the highest in 2024-25 so far.

Among the retail modes, transactions under the Unified Payments Interface (UPI), the National Electronic Funds Transfer (NEFT) and the National Automated Clearing House (NACH) posted double digit growth (y-o-y) in September. UPI scaled a new high of 15 billion transactions in the month, while its average ticket size declined to Rs 1,372, indicating growing adoption of digital modes for small-value transactions, it said.

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