India’s Economic Balancing Act: Growth vs. Global Woes

September 30, 2024

12 min read

By 1 Finance team

India’s economy continues to steer a complex landscape, with GDP growth moderating to 6.7% YoY in Q1 FY2025 (June 2024) from 7.8% in the prior quarter, yet maintaining a robust 7.2% projection for FY2025, as per the Reserve Bank of India. Despite global headwinds, the services sector (7.2% GVA growth) and industrial sector (8.3% GVA growth) remain pillars of strength, supported by steady domestic demand and government capital expenditure. However, agriculture, though improved at 2.0% GVA growth, faces risks from erratic monsoon patterns despite an 8% above-normal rainfall season. Retail inflation surged to 5.5% in September 2024, prompting the RBI to hold the repo rate at 6.5% for the tenth consecutive meeting. Bolstered by a record $700 billion in forex reserves and a fiscal deficit target of 4.9% of GDP, India’s economic outlook remains resilient. This quarter’s update, guided by the 1 Finance Macroeconomic Index’s rise to 62.5 in September 2024, explores the trends shaping India’s macroeconomic trajectory for July-September 2024.

Key Takeaways

India’s GDP growth slowed to 6.7% YoY in Q1 FY2025 from 7.8% in Q4 FY24, with FY2025 projected at 7.2%, driven by services (7.2% GVA) and industrial (8.3% GVA) sectors.
Agri GVA rose to 2.0% in June 2024, supported by an 8% above-normal monsoon, but early deficits (33.1% as of June 19) and climate risks threaten Kharif output.
CPI inflation hit 5.5% in September 2024, up from 3.6% in August, with food inflation at 5.7%; crude oil prices ($75/barrel in October) and OPEC+ cuts add pressure.
RBI maintained the repo rate at 6.5% in October 2024, with no immediate cuts expected due to inflation above the 4% target, keeping borrowing costs high.
Nifty 50 gained 2.3% in September, with FPIs investing $13.8 billion in equities and domestic AUM soaring 63% YoY to ₹31.1 trillion, despite coalition-related volatility.
Forex reserves reached $700 billion, but merchandise exports fell 9.3% YoY in August, and the trade deficit widened to $29.6 billion; bond index inclusion boosts FPI inflows.
RBI’s ₹2.11 lakh crore surplus transfer and a 4.9% fiscal deficit target for FY2025 enhance fiscal space, supporting capex or reduced borrowing.

India’s Macroeconomic Summary

1. Economic Stability Amid Inflationary Pressures and Industrial Challenges

Note: Data is provisional
Source: CMIE Economic Outlook, 1 Finance Research

The 1 Finance Macroeconomic Index is a comprehensive index, integrating multiple subindices based on high-frequency indicators. It offers nuanced insights into India’s economic trends and phases.

The Monetary Policy Committee’s decision to maintain the policy rate at 6.5% for the tenth consecutive period reflects a commitment to economic stability amidst persistent inflationary pressures.
While the GDP growth rate stood at 6.8% for Q1 FY 2024-25, the inflation rate of 5.5% in September 2024 remains above the target, necessitating continued caution from the RBI.
The Index of Industrial Production (IIP) recorded a slight dip of 0.1% in August 2024, with a 1% increase in manufacturing, but showed declines in the mining (4.3%) and electricity (3.7%) sectors. The RBI’s stable policy rates aim to support industrial recovery by ensuring credit availability and investment.
India’s merchandise trade deficit improved to $20.8 billion in September 2024, from $29.6 billion in August, due to a drop in imports, especially gold, with total merchandise imports marking a five-month low at $55.4 billion. This positive trade balance contributes to macroeconomic stability, bolstered by the RBI’s steady monetary policy.
The stability of the Indian economy is reflected in the 1 Finance Macroeconomic index (1FMI), which rose to 62.5 in September 2024, compared to 60 in the June 2024 quarter.

2. Understanding Monetary Policy Decision

The RBI's Monetary Policy Committee (MPC) kept the repo rate steady at 6.5%, marking the tenth consecutive instance of the status quo.
The MPC’s decision, supported by a majority of 5-1 votes, reflects confidence in India's economic resilience amid global and domestic uncertainties. While one member advocated for a rate cut, the neutral stance allows flexibility for future rate adjustments.
The RBI revised its inflation outlook: 4.1% for Q2 (Sep 2024), 4.8% for Q3 (Dec 2024) and 4.2% for Q4 (Mar 2025). This reflects a cautious approach to risks like erratic weather, geopolitical tensions and commodity price fluctuations.
The GDP growth forecast for FY 2024-25 remains at 7.2%, driven by strong consumer spending, investment demand, improved agricultural output and a thriving services sector.
Concerns about NBFC lending practices, particularly high-interest rates and excessive fees, were raised. The RBI emphasised the need for strict oversight to ensure financial stability.
The neutral stance maintains flexibility, allowing the RBI to adjust rates in response to future economic conditions while supporting growth and controlling inflation.

3. Effects on Liquidity

Note: Data is provisional
Source: CMIE Economic Outlook, 1 Finance Researc

By maintaining the repo rate at 6.5%, the RBI ensures stability in the financial system's liquidity and controls the excessive growth in money supply (M3), which increased by 8.3% year-on-year as of September 2024.
The Credit-Deposit Ratio (CDR) stood at 74.5% in September 2024, indicating healthy demand for credit across sectors.
Non-food credit from scheduled commercial banks (SCBs) rose significantly by ₹1,425 billion in August 2024, driven by increased lending to the industry and services sectors, reflecting stronger business confidence and credit availability.
Credit to the services sector grew notably by ₹215.1 billion in August 2024, a significant jump from the average ₹119 billion in prior months, indicating robust demand in the sector.
Personal loans also saw substantial growth, increasing by ₹530.1 billion in August, further fueling consumer spending and supporting economic activity.
Overall, the RBI’s steady approach fosters economic growth, ensures price stability and provides adequate liquidity across essential economic segments.

4. Broader Economic Impacts

In August 2024, the Index of Industrial Production (IIP) subtly declined by 0.1% YoY, signalling a slowdown in key sectors such as mining and electricity generation, which experienced YoY reductions of 4.3% and 3.7% respectively.
Manufacturing output recorded a modest 1% growth, reflecting challenges in key industries such as chemicals and basic metals. In contrast, the consumer durables sector exhibited positive growth, illustrating a diverse performance in industrial production.
September saw a significant shift in dynamics, with merchandise imports falling to a five-month low of $55.4 billion. This reduction played a pivotal role in shrinking the trade deficit to $20.8 billion from a ten-month peak of $29.6 billion the previous month, easing pressures on external accounts.
On the fiscal front, tax revenues, encompassing Goods and Services Tax (GST) and corporate taxes, have shown impressive strength, mirroring the underlying vigour of the economy.
This fiscal robustness, coupled with a projected GDP growth of 7.2% for the fiscal year 2024-25, is supported by persistent demand in consumption and incremental gains in manufacturing output.

5. The Global Context

In October 2024, global financial markets experienced mixed trends due to divergent central bank policies and continued economic challenges. Weaker-than-expected Q2 results from major economies, coupled with enduring inflation, painted a bleak picture for the markets.
Reflecting these global headwinds, Indian equity indices such as the Nifty 50 and S&P BSE Sensex witnessed declines, signalling concerns over the pace of corporate growth and dampening investor confidence.
During this period, Foreign Portfolio Investors (FPIs) showed a continuation of their cautious stance, withdrawing $1.9 billion in the week ending October 18. While this represented a moderation from the higher outflows of $3.7 billion seen in the prior two weeks, it underscored the ongoing apprehension among investors in light of global uncertainties.
The Indian rupee weakened against the US dollar, crossing the ₹84 threshold for the first time, a movement influenced by the prevailing risk aversion in the global markets. Despite these challenges, the bond market in India exhibited a degree of resilience.

6. Portfolio Strategy for Investors

Correlation	Equity	Real Estate	Passive Income Assets	Debt	Alternative Investments
Equity	1.00
Real Estate	-0.02	1.00
Passive Income Assets	0.24	0.77	1.00
Debt	0.12	0.09	0.05	1.00
Alternative Investments	-0.04	0.04	0.02	-0.01	1.00

Source: CMIE Economic Outlook, Bank for International Settlements (BIS), National Housing Bank (NHB), Reserve Bank of India (RBI), ACE MF, Yahoo Finance, 1 Finance Research

Diversification in investment strategies aims to minimise risk and enhance returns. By spreading investments across asset classes, a diversified portfolio reduces exposure to specific risks and improves overall stability.
For example, the low correlation of 0.12 between equities and debt instruments shows that when equities decline, bond yields may either hold steady or rise. Similarly, real estate and equities have a near-zero correlation of -0.02, meaning they don’t move in sync, providing a buffer against market volatility.
Economic cycles impact asset correlations, highlighting the need for dynamic portfolio management. During economic expansions, equities and real estate may show higher correlations, prompting adjustments to capitalise on growth. Conversely, during downturns, shifting towards more stable assets like debt instruments may be beneficial.
An investor’s life stage also influences their strategy. Younger investors may focus on growth with higher equity allocations, while those nearing retirement should prioritise stability with more conservative assets like debt.
Timely adjustments to the asset mix, based on life events such as buying a home or approaching retirement, are crucial to aligning investment strategies with changing financial goals.

[Use our Asset Allocator to tailor your investment strategy based on your age and India’s economy, to optimise growth and stability.]

Conclusion

The RBI’s consistent monetary policy, aiming to balance growth and inflation, underscores its cautious approach in an unpredictable economic environment. Despite global uncertainties affecting markets, India’s economic fundamentals, supported by stable fiscal policies and diverse industrial performance, provide a solid foundation for future growth.

FAQ's

The RBI kept the repo rate at 6.5% for the tenth consecutive time in October 2024 to balance economic growth and inflation, which rose to 5.5% in September, above the 4% target, amid risks like geopolitical tensions and erratic weather.

The 2024 monsoon ended with 8% higher-than-normal rainfall, boosting Kharif sowings by 1.5% and reservoir levels by 12.7% above the 10-year average, but early deficits and climate risks raise concerns for crop yields and rural demand.

The services sector will likely see steady growth, fueled by tourism and real estate, though services exports face weak global demand. The industrial sector, especially manufacturing, is slowing due to soft demand for non-durables. Investment-friendly reforms and global economic recovery are expected to support future growth, but private investment remains subdued.

India’s economic growth is supported by strong domestic demand, a rebound in services and real estate sectors, continued government capital expenditure, and robust personal loan growth. A better-than-expected monsoon has aided agriculture. Moreover, the government's fiscal prudence and policy continuity under the returning NDA administration have bolstered investor confidence. The RBI projects a 7.2% GDP growth for FY25, supported by strong consumption and global recovery.

Global market volatility, driven by divergent central bank policies and persistent inflation, has led to declines in Indian indices like the Nifty 50 and S&P BSE Sensex. These headwinds raise concerns about corporate growth, dampening investor confidence and reflecting India’s economic ties to global trends.

Disclaimer: The information provided in this blog is based on publicly available information and is intended solely for personal information, awareness, and educational purposes and should not be considered as financial advice or a recommendation for investment decisions. We have attempted to provide accurate and factual information, but we cannot guarantee that the data is timely, accurate, or complete. India Macro Indicators or any of its representatives will not be liable or responsible for any losses or damages incurred by the readers as a result of this blog. Readers of this blog should rely on their own investigations and take their own professional advice.

Economic Landscape	Recent Updates	Near-term Outlook
Indian Economy	India’s GDP growth slowed to 6.7% YoY during the June 24 quarter compared to 7.8% in March 24 (8.2% in June 23), due to the high base and deceleration in manufacturing sector activity. Services sector GVA increased (7.2%) while industrial GVA decelerated (8.3%) in the June 24 quarter, compared to the previous quarter. Growth in agri GVA improved compared to the last three quarters, however, lower reservoir levels and delayed onset of monsoon capped the growth at 2.0% in June 2024. Monsoon season (July-Sept 24) concluded with 8.0% higher than normal rainfall, above IMD’s projection of 106% of the long-period average. Retail inflation surged to 5.5% in September, up from 3.7% in August. MPC kept policy rates unchanged for the tenth consecutive time, in its October 2024 meeting. The government has set a lower fiscal deficit target of 4.9% of GDP for FY2025.	Easing inflation and prospects of better agri output supported by favourable monsoon enhance India's economic prospects, while the prolonged geopolitical issues remain promising, with some supported by growth in services and industrial sectors and improved fiscal conditions. The NDA government's return ensures policy continuity, though coalition management may cause some market volatility. The RBI's record surplus transfer provides fiscal space for either increased capex or a cutback in market borrowings, which helps reduce pressure on domestic yields. Retail borrowing costs are expected to moderate in FY25, supporting both consumer spending and business growth. Strong domestic demand and an improving global environment are likely to maintain India's growth momentum, with the RBI projecting 7.2% GDP growth for FY25.
Services Sector Activity	Improvement in quarterly growth (7.2% during June 24) in services GVA reflects a better demand condition in the economy. Credit offtake by the services sector moderated in August (13.9% YoY) compared to the last four months. Services PMI expanded at the slowest pace in the last ten months and slipped below the 60 mark to 57.7 in September, due to weak growth in new export orders. Global demand for services exports remained weak, reflected through a 5.7% YoY rise in August 2024.	The services sector is expected to maintain broad-based growth, driven by strong credit demand in sub-sectors such as the hotel and tourism industry and real estate. Expectations of favourable economic policies by the newly elected government should provide conducive business conditions, while lingering geopolitical uncertainties remain a concern. Moderation in government capex growth in FY25 may hinder the pace of growth.
Industrial Sector Performance	Manufacturing GVA grew at the slowest pace in the last four quarters at 7.1% on June 24. Credit deployment by industries improved at 9.7% in August, with micro & small (13.5%) and medium (19.2%) small industries maintaining higher demand compared to large industries (7.7%). IIP recorded a 4.8% YoY growth in July, with diverging consumption patterns. Consumer non-durables continued with weak demand (-4.4%), while consumer durables improved (8.2%). Manufacturing PMI slid to an eight-month low of 56.5 in September, due to weak growth in new export orders and a sustained rise in input costs.	Global economic recovery is expected to boost demand for Indian manufacturing exports, while diverging consumption patterns in the domestic market may limit broad-based industrial growth. Stagnant credit demand by large-scale industries signals a potential decline in private investments, while a continuation of investment-friendly reforms by the government, such as Make in India 2.0, to attract private and foreign investments will be key for sustaining the growth momentum.
Agriculture Output	Southwest monsoon ended with 8% higher rainfall than LPA against IMD’s forecast of 6.0% higher than the LPA. Favourable monsoon conditions supported Kharif sowings, which improved by 1.5% compared to the normal sown area as of September 20, 2024. The reservoir level was 12.7% higher than the last 10 years' average as of September 26, 2024.	The weak start to the monsoon, with a 33.1% deficit compared to normal as of 19th June, raises significant concerns for Kharif crop output. While the IMD forecasts above-normal monsoon for 2024, climate change impacts could lead to erratic rainfall patterns, potentially causing localised flooding or dry spells that may adversely affect crop yields. Timely and well-distributed rainfall remains crucial for boosting agricultural incomes and reviving rural demand, which was adversely affected in FY24.
Consumer Price Index (CPI) Inflation	CPI inflation reached a 59-month low of 3.6% in August and remained at a similar level in September, supported by easing food inflation (5.7%) and core inflation (3.1%). Crude oil prices recovered above $75/barrel in October after falling sharply in September to an average of $73.7/barrel Credit demand grew at a slower pace in September (13.6% YoY) due to moderating demand for services and personal loans.	The inflation outlook appears mixed. Favourable monsoon forecast offers some respite, however, the weak progress in the monsoon so far adds to the concern. Crude oil prices, though easing recently, remain ~10% higher than last year's levels and the decision by OPEC+ to maintain deep oil output cuts into 2025 is likely to keep supply tight and prices elevated, potentially exacerbating inflationary pressures. Upbeat consumption demand, coupled with uncertain global commodity prices, is expected to keep inflation beyond the RBI's comfort level of 4%.
Equity Market Outlook	Nifty 50 index monthly and annual returns in September remained positive at 2.3% and 31.4%, respectively. PE ratio increased to 24.3 from 23.5 in August and 22.2 in September 2023. FPIs turned bullish on Indian markets since June and net invested $13.8 billion in equities until September. Domestic investors too maintained their bullish stance and their investments, which crossed ₹2339.8 billion between April to September. Equity MF AUMs grew 63% YoY and reached ₹31.1 trillion by September end.	The NDA government's return to power has instilled optimism, raising expectations for continued economic reforms and policy consistency. However, the complexities of managing a coalition government may lead to market fluctuations. Global economic headwinds appear to be easing, which, coupled with India's healthy domestic growth prospects, could provide support for market valuations. The market's performance in the coming months will likely be shaped by policy announcements, corporate earnings and global economic developments.
Global Economic Impact	India's merchandise exports fell significantly by 9.3% in August (YoY) while imports increased by 3.3%, widening the trade deficit to $29.6 billion. Services exports grew at a slower rate at 5.7% YoY, indicating falling global demand. FPIs net invested $5.9 billion in September (equity + debt). Forex reserves crossed a record $700 bn in September 2024, rising by $118 bn in a year. Exchange rate depreciated over ₹84/$, closing at ₹84.07/$ on October 15, 2024 (₹83.0/$ March-end).	Improving global economic conditions and domestic demand are aiding trade growth, however, delays in monetary easing by the central banks may dampen global demand. The inclusion of Indian bonds in global debt indices starting June 2024 is expected to attract huge FPI investments in the debt market, bolstering forex reserves, which will enhance India's resilience against potential global challenges.
Financial Sector Soundness	Growth in bank credit moderated to 13.3% in August while aggregate deposits grew by 11.1% YoY. The credit deposit ratio stood at 79.3% in August (80.3% in March 2024). The banking system liquidity moved to a surplus of about ₹1.0 trillion during July and August (on average), after remaining in a deficit of about ₹0.54 trillion during June. The weighted average domestic term deposit rate of SCBs remained almost unchanged due to weak deposit growth, while lending rates moved downwards in anticipation of rate cuts by the RBI.	Recent improvement in banking system liquidity is expected to enhance banks' capacity to manage robust credit demand. However, a potential delay in policy rate cuts by the RBI may keep borrowing costs elevated. This could exert pressure on credit growth in FY25, as higher interest rates may dampen demand for loans across sectors. The divergence between credit and deposit growth rates remains a point of concern. Banks may need to focus on attracting more deposits to sustain the current pace of credit expansion, potentially leading to more competitive deposit rates in the coming months.
Interest Rate Outlook	The repo rate has been maintained at 6.5% since February 2023, as retail inflation remained above RBI’s median target of 4% until July 2024. With the fall in inflation to sub 4.0% levels since August, short-term G-sec yields fell in anticipation of potential rate cuts by RBI in the near term. Long-term G-sec, AAA and AA-rated corporate bond yields rose. The spread between 1-year and 10-year G-sec yield widened to 12 basis points in September.	Given India’s strong growth fundamentals, ongoing concerns over food inflation and delays in monetary easing by major global central banks, the RBI is expected to continue its focus on managing inflation. Hence, the likelihood of an immediate rate cut is low.