MUMBAI: India’s newly appointed central bank governor, Sanjay Malhotra, is confident the country’s economy will likely rebound in 2025, driven by strong consumer and business confidence. These are his first public remarks on the growth outlook since taking office earlier this month.
In the foreword of the bi-annual Financial Stability Report released yesterday, Malhotra noted that the economy is expected to recover following a slowdown in economic activity during the first half of 2024-2025. “The outlook for the Indian economy is set to improve after a period of slower growth in the first half of this fiscal year,” Malhotra wrote. “Consumer and business confidence for the year ahead remain high, and the investment climate is optimistic, with corporations entering 2025 with strong balance sheets and high profitability.”
Malhotra, a seasoned bureaucrat, was a surprising choice for the role, having been appointed just two days before his three-year term began on December 11. In a press briefing marking his appointment, he emphasized that stability and growth were key priorities for India’s economy, though he refrained from providing specific guidance on future monetary policy decisions.
Under the previous leadership of Shaktikanta Das, the Reserve Bank of India (RBI) maintained interest rates steady for nearly two years, despite growing calls for rate cuts, including from the government. Economists now anticipate that Malhotra may shift gears and potentially cut interest rates as early as February.
The Indian economy posted its weakest growth in nearly two years in the most recent quarter, prompting analysts and the RBI to revise their growth forecast for the current fiscal year to approximately 6.5%, a sharp decline from the more than 8% recorded in the previous fiscal year that ended in March 2024.
In its Financial Stability Report, the RBI predicted that growth will pick up in the third and fourth quarters of the financial year, driven by a recovery in domestic factors such as public consumption and investment, strong service exports, and easier financial conditions.
Looking beyond India, Malhotra noted that global economic prospects have improved, largely due to a slowdown in inflation, which may create space for monetary policies to support growth.
However, he also cautioned that the medium-term outlook remains challenging. “Geopolitical tensions, financial market volatility, extreme climate events, and rising debt levels present significant risks,” Malhotra said.
Focus on Financial Stability
Malhotra reiterated that the RBI remains committed to ensuring financial stability, which he believes is crucial for India to achieve sustainable growth. He highlighted that the financial sector remains robust, with strong earnings, low levels of impaired assets, and solid capital buffers.
The RBI’s stress tests, outlined in the Financial Stability Report, show that the capital levels of India’s banking system and non-banking financial companies remain well above the regulatory requirements. The capital adequacy ratio for the banking system is expected to reach 16.5% by March 2026, nearly unchanged from 16.6% in September 2024, and no lender is expected to fall below the minimum capital requirement of 9%, even under adverse conditions.
However, the RBI also anticipates that bad loan ratios will increase from their recent multi-year lows. This is primarily due to stretched asset valuations and growing indebtedness. The gross non-performing assets (NPA) ratio in Indian banks is expected to rise to 3% by March 2026, up from 2.6% in September 2024.
A weakening economy can lead to declining corporate profits and household incomes, which in turn makes it more difficult for borrowers to meet their obligations, posing a challenge to banks and the financial system as a whole.
