India remains fastest growing economy despite challenges

Despite GDP slowdown, inflation rise, India retained its fastest growing economy tag in 2024 too as major economies and rest of the world were reeling under 4 per cent growth levels. India’s Real GDP growth eased to a seven-quarter low of 5.4 per cent in the second quarter (July-Sept) of the current 2024-25 fiscal year from 6.7% in the preceding quarter. The outlook for Q3 appears bright, as reflected in the performance of High Frequency Indicators (HFIs) for October and November 2024, according to the Finance Ministry. The supporting factors for economy rebound include an increase in MSP for Rabi crops, high reservoirs level and adequate fertiliser availability, positive forecast on industrial production.

Reserve Bank also significantly lowered the growth projection for current fiscal year to 6.6 per cent from 7.2 per cent earlier in view of slowdown in economic activity as well as stubborn food prices.

The GDP growth was 8.2 per cent in FY24, seven per cent in FY23, 9.1 per cent in FY22 and -5.8 per cent in FY21 and 3.9 per cent in FY20.

Asia and the Pacific’s economies are projected to grow 4.9 per cent in 2024, slightly below ADB’s September forecast of 5 per cent. This was primarily because two domestic demand components -- private final consumption expenditure and gross fixed capital formation -- together accounted for a fall of 1.5 percentage points.

The Asian Development Bank (ADB) lowered India’s economic growth forecast to 6.5 per cent for the current financial year from its earlier estimate of 7 per cent and from 7.2 per cent to 7 per cent next year, due to lower-than-expected growth in private investment and housing demand.

In 2024, Indian currency Rupee fell Rs2.06 or 2.47 per cent to all-time low of 85.27/USD on Thursday (Dec 26, 2024) from 83.21 on December 31, 2023. The fourth quarter of 2024 has been challenging for RBI to support the home currency in the forex market. RBI spent $44.5 billion alone to defend rupee in October, during which rupee fell 30 paise to Rs84.06/USD.

Net FPI outflows were $10.9bn in October and $2.4 billion in November. However, FPIs turned positive during December (as of Dec 18) with net inflows of $3.6 bn.

The sluggish domestic stock market, strong demand for the Greenback from importers and surging crude oil prices were weighing on the local unit. Hawkish tone of US Fed and improving US economy would further support the US dollar. Prior to these developments, unabated FII outflows have been impacting the Indian currency.

Rupee’s real effective exchange rate (REER) climbs to 108.14 in Nov from 107.20 in October 2024, indicating the Indian unit appreciated by 0.9 per cent m-o-m in November. REER, which represents the inflation-adjusted, trade-weighted average value of a currency against its trading partners, is often used as an indicator of external competitiveness.