The Finance Ministry has partly blamed the RBI's tight monetary policy for the economy’s recent weak performance. However, it expects economic growth will improve in the second half of the 2024-25 fiscal year as demand picks up and restrictive measures ease.
“The combination of monetary policy stance and macroprudential measures by the central bank may have contributed to the demand slowdown,” the ministry’s Department of Economic Affairs said in its monthly economic review for November, released on Wednesday.
The Centre expects the economy to grow at 6.5 percent in FY25 after a dull first half of the current fiscal, driven by gains in agricultural and industrial activity, according to the review report. The ministry has cited the Reserve Bank's monetary policy stance among the reasons for the slowdown in the first half of FY25, Business Standard reported citing the review
The GDP growth rate fell to a seven-quarter low of 5.4 percent in the July-September quarter, down from 6.7 percent in the previous quarter. However, the RBI kept its key rates unchanged for 11 straight monetary policy meetings despite pressure from the industry, citing inflation.
“At the same time, the possibility that structural factors may also have contributed to the slowdown in H1 should not be ruled out. The combination of monetary policy stance and macroprudential measures by the central bank may have contributed to the demand slowdown,” the ministry review said.
The report also notes the positive impact of the RBI lowering the cash reserve ratio (CRR) from 4.5 percent to 4 percent in its last monetary policy meeting.
“That should help boost credit growth, which has slowed a little too much and quickly in FY25,” the report said.
The report also attributes the slowing urban consumption growth to lower private-sector hiring. The report states that the growth outlook for October to December appears bright, with rural demand remaining resilient and urban demand picking up in the first two months of the quarter.
"An increase in Minimum Support Price (MSP) for rabi crops, high reservoir level, and adequate fertiliser availability bodes well for rabi sowing. Industrial activity is likely to gain traction," it noted.
The ministry says that the conclusion of the monsoon season and the expected increase in government capital expenditure are likely to support the cement, iron, steel, mining, and electricity sectors.
The services sector continues to perform well, with PMI services being in an expansionary zone in October and November 2024.
On the demand side, the ministry said that the rural demand remains resilient highlighted by 23.2 percent and 9.8 percent growth in two-wheeler and three-wheeler sales and domestic tractor sales, respectively.
"Urban demand is picking up, with passenger vehicle sales registering year-on-year growth of 13.4 percent in October-November 2024 - and domestic air passenger traffic witnessing robust growth," the report said.
