Mar 2025
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India is regarded as one of the fastest growing economies in the world. However, off-late, India is facing a slowdown due to multiple internal and external factors. With GDP growth projected at 6.5% for FY25 (Source: Budget Documents) this marks the slowest expansion in four years. Key concerns include inflation, weak consumer demand, sluggish private investment, and global trade disruptions. Policymakers have introduced fiscal (less) and monetary measures (more) to counteract this decline. The question remains—will these interventions be enough for a strong revival?
Factors Contributing to the Slowdown
RBI’s Response to the Slowdown
The RBI has done a lot of heavy lifting in terms of reviving growth by introducing several measures to combat the economic slump:
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Repo Rate Cut: A 25 basis points (bps) reduction to 6.25% aims to make borrowing cheaper, stimulating investment and consumption. The rate cut can go a long way in arresting the slowdown and is quite credible as it comes after the government announced 4.4% Fiscal Deficit target for FY26 as compared to 4.8% achieved in FY25 (vs 4.9% initially budgeted), (Source: Budget Documents).
The RBI’s recent 25 bps rate cut aligns with the market and government’s expectations, reflecting a broader trend among central banks, in both emerging and developed economies. It was widely acknowledged that existing interest rates were too restrictive, necessitating a reduction. However, despite this move, the RBI refrained from announcing additional liquidity measures, possibly due to previous interventions. The central bank is expected to reassess and take further steps in the coming weeks to manage liquidity conditions.
A segment of the market had called for another Cash Reserve Ratio (CRR) reduction, but it is essential to note that the RBI has already implemented two consecutive 50bps CRR cuts within the past two months. With the CRR now at 4%, the lowest in 52 years (excluding the extraordinary Covid period when it stayed at 3% for most of FY21), the RBI is unlikely to reduce it further unless faced with an emergency situation.
While the rate cut was implemented, the RBI maintained a neutral stance on monetary policy, aiming to balance inflation control with economic growth. Notably, this decision was made even though the December 2024 Consumer Price Index (CPI) was still 100 bps above the targeted 4% level, highlighting the central bank’s flexible approach amid slowing growth.
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Liquidity Infusion: The RBI has already implemented several liquidity-enhancing actions, including a 50bps CRR cut (INR 1.16 trillion liquidity infusion), INR 800 billion in Open Market Operations (OMOs), and a USD 5 billion swap along with Variable Rate Reverse Repo (VRR) actions, (Source: RBI Announcements). If Foreign Portfolio Investor (FPI) outflows continue in February 2025, we believe, additional liquidity-enhancing measures such as further CRR cuts, OMOs, and dollar swaps could become necessary.
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Encouraging Credit Growth: Easing lending restrictions for small and medium enterprises (SMEs), a key employment sector.
Raising of income tax exemption limits is a master stroke to spur consumption by increasing disposable income, but more importantly it can potentially bring a lot of money in the formal channels In India, as of FY24, only 75mn people filed Income Tax returns – that’s just 5% of the population. Out of this 75mn, close to 65mn filed returns with annual income under INR 12 lakhs. So effectively, remaining 10mn or less than 1% of population would be left to pay for income tax for the whole country. However, a closer look at the number of returns filed at every income level reveals important data points. Over 12mn returns were filed in INR 4.5 lakh to INR 5 lakh income slab, which was effectively the exemption threshold. Widespread tax planning can effectively bring a considerable amount within the banking channels and tax net – thereby boosting the economy.
THREE RECENTLY RELEASED KEY ECONOMIC INDICATIONS WE'VE BEEN WATCHING FOR RECOVERY SIGNS
1.GDP GROWTH
- Q3FY25 GDP growth came in at 6.2%, aligning with consensus estimates.
- Notably, the previous quarter’s growth was revised upward to 5.6% (from 5.5%).
- Even more encouraging, FY25 guidance has been raised to 6.5% (vs. 6.4% earlier), implying a robust 7.6% growth in Q4FY25.
Source: Government release
- After hitting a 9-month high of 12.3% in January 2025, a repeat would have been ideal.
- February 2025 collections came in at 9.1%, still the second highest in the last 5 months.
- - If we assume the revised GDP guidance of 7.6% growth in Q4FY25, the next two months could see GST growth in the range of 11-12% YoY.
Source: Government release
View: Neutral to mild positive
3. CAPEX SPEDNING
- Based on the revised budget for FY25, the Centre needed to spend INR 3.33 trillion in Q4FY25 (~INR1.11 trillion per month).
- January 2025 capex stood at INR72,000 crore, below the required run rate.
- To meet the guidance, capex spending over the next two months needs to average INR1.31 trillion per month.
Source: Controller General of Accounts
View: Neutral To Mild Negative ⚠️
CONCLUSION: There’s credible evidence that the worst of the economic slowdown may be behind us. Green shoots are visible, indicating we’re on the path to recovery. 🌱 What makes this even more interesting is that these recovery signs are emerging at a time when:
- Over 50% of Nifty 500 Index stocks are down more than 35% from their peaks.
- 90% of Nifty 500 Index stocks are trading below their 200-Day Moving Average (DMA) — This is only the 5th correction in 23 years, to witness such weak breadth.
TRIVIA: With Q3FY25 GDP, India crossed the USD 1 trillion quarterly GDP mark for the first time ever! (Source: Government data)
Conclusion
India's economic slowdown is a challenge, but policy measures provide a foundation for recovery. A combination of monetary easing, fiscal incentives, and structural reforms can help restore growth momentum. With a clear execution strategy, India can position itself for sustained economic expansion in the coming years. We see the current phase as a pause after a strong bounce back post covid and expect India to soon resume its strong growth journey both in economic terms as well as corporate earnings.
