The RBI's monetary policy Committee (MPC) unanimously decided to cut the repo rate by 25 basis points, marking its first reduction in nearly five years. This shift from inflation control to prioritising growth comes amid a slowdown in India’s manufacturing sector, a key driver of jobs. The RBI’s optimism about India’s growth is evident, with executive director Rajiv Ranjan stating that the rate cut signals the RBI’s commitment to reviving the economic momentum. However, this optimism contrasts with cautionary signals, such as faltering consumer confidence and potential risks in the retail credit market, suggesting that the economic outlook is still complex.
RBI Governor Sanjay Malhotra’s statement underscores cautious optimism regarding growth. Rural demand continues to rise while urban consumption remains subdued and high-frequency indicators give mixed signals. However, improving employment conditions, tax relief in Union Budget 2025-26, moderating inflation, and healthy agriculture activity are expected to support household consumption.
Government consumption expenditure is expected to remain modest, but higher capacity utilisation, robust business expectations, and government policy support should foster growth in fixed investment. This is notable, especially since GDP growth is expected to slow to a four-year low of 6.4% in FY25, according to the National Statistics Office’s First Advance Estimates. FY24 GDP growth stood at 8.2%. During the pandemic, consumption fell but rebounded due to pent-up demand. Paras Jasrai, Senior Economic Analyst at India Ratings & Research, says, “We see a more secular increase in consumption, with lower-segment consumption recovering due to positive real wage growth, combined with the rate cut cycle. The economy is expected to grow, and inflation is trending downwards.”
The RBI’s forecast for FY26 real GDP growth is 6.7%, with Q1 at 6.7%, Q2 at 7%, Q3 at 6.5%, and Q4 at 6.5%. However, the RBI’s January 2025 bi-monthly consumer confidence survey, released on February 7, paints a slightly more cautious picture. Consumer confidence declined, with tempered sentiments across most survey parameters, except for price levels. The current situation index dropped by 0.3 points to 93.7 in January 2025. While households remain optimistic about the one-year outlook, their sentiments on key factors moderated overall, with the future expectations index falling by 1.2 points to 120.7. Respondents expressed less pessimism about current price levels and inflation compared to the previous survey, although they expect both prices and inflation to rise slightly. The survey also showed more cautious attitudes toward spending on both essential and non-essential items compared to November 2024.
A crucial factor influencing India’s economic trajectory is the rise in unsecured retail credit, which raises concerns about financial stability and sustainability of consumer spending. The central bank tracked the retail book growth of lenders—banks and non-banking financial companies —over five years from FY19 to FY24 and found that as of June 2023, personal loans constituted the single largest category of bank credit, accounting for 49% of total borrower accounts, and 30% of the outstanding non-food credit.
The RBI, in the ‘Report on Trend and Progress of Banking in India (FY22), observed that in recent years, banks displayed “herding behaviour” in diverting lending away from the industrial sector towards retail loans. “Empirical evidence suggests a build-up of concentration in retail loans may become a source of systemic risk,” says the report.
And then, in November 2023, the RBI increased the risk weights on unsecured lending to address this. “There has been some moderation in credit (retail) growth, but delinquency levels and leverage warrant enhanced vigil,” it said in the Report on Trend and Progress of Banking in India (FY24). Subsequently, the RBI rolled back the higher risk weight assigned for bank loans to NBFCs and lowered risk weight requirements for loans extended by banks to microfinance firms.
Additionally, the banking regulator “expects the boards of REs (regulated entities) to “show prudence and avoid exuberance in the interest of their own financial health as also systemic financial stability.”
Will demand in the economy slip if lenders don’t push retail credit aggressively? According to Madan Sabnavis, Chief Economist at Bank of Baroda, consumption demand will increase. “It is not entirely dependent on leverage — as in, on the loans availed of by customers.”
However, the Financial Stability of Report of December 2024 highlights concerns over the sharp rise in write-offs, especially among private banks. This could be partly masking worsening asset quality in this segment and dilution in underwriting standards. Fresh accretion of bad loans in the retail loan portfolios was also dominated by slippages in the unsecured loan book, with 51.9% from unsecured loans as of September-end 2024.
It always pays to be cautious.
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