Mumbai, 21 Oct

Private investment is showing encouraging signs on the back of rising business optimism and a pick up in consumption demand during the ongoing festival season, according to the Reserve Bank's October Bulletin released on Monday.

In India, the aggregate demand is poised to shrug off the temporary slowdown in momentum in the second quarter of 2024-25 as festival demand picks up pace and consumer confidence improves, the article on the 'State of the Economy' published in the Bulletin said.

Further, rural demand is expected to get a boost from the improved agricultural outlook. Private investment should pick up steam in response to signs of a pick-up in consumption demand and rising business optimism.

In India, aggregate demand is poised to shrug off the temporary slowdown in momentum in the second quarter of 2024-25 as festival demand picks up pace and consumer confidence improves.

The rural demand is expected to get a boost from the improved agricultural outlook.

"Private investment should pick up steam in response to signs of pick up in consumption demand and rising business optimism," the article said.

With the financial sector ready to intermediate resources for productive investment, buffered by healthy balance sheets, and the government's continued thrust on capex, the investment outlook appears bright.

The article authored by a team led by RBI deputy governor Michael Debabrata Patra said the global economy remained resilient in the first half of 2024, with declining inflation supporting household spending.

Stable growth momentum amidst monetary policy easing is becoming the prevailing theme across most economies.

"In spite of geopolitical tensions, India’s growth outlook is supported by robust domestic engines," it said.

Some high-frequency indicators have, however, shown a slackening of momentum in the second quarter of 2024-25, partly attributable to idiosyncratic factors like unusually heavy rains in August and September.

"Looking ahead, private investment is showing some encouraging signs in terms of lead indicators while consumption spending is shaping up for a festival season revival," the authors said.

The article further said recent data suggest that credit card transaction volumes have slowed as lenders are adopting caution in view of risks flagged in unsecured loans.

Incipient stress in the microfinance sector appears to have been driven by lenders’ drive to disburse loans rather than borrowers’ demand.

The self-regulatory organisation – Microfinance Institutions Network (MFIN) - points to guardrails to mitigate asset quality challenges, such as capping a borrower’s loan repayment obligations at 50 per cent of the household’s income, limiting the number of microfinance lenders and capping total indebtedness.

Credit bureau data, the article said, indicate that retail credit growth has moderated as lenders have tightened personal loan supply.

It also noted that in the banking space, deposit rates are expected to stay elevated despite some slowing down of credit growth.

The article also said digital payment transactions are expected to gain from strong tailwinds with the onset of the festive season, marked by mega e-commerce sales and rising demand from smaller towns and cities.

Increasingly, consumers in Tier 3 to 6 cities are using digital payment services daily.

"These developments highlight the vast potential for driving adoption and ensuring sustained usage of digital payments at the grassroots level," it said.

Further, the article noted that liquidity conditions remain in surplus mode.

The Reserve Bank, it said, will continue to be nimble and flexible in its liquidity management operations and deploy an appropriate mix of instruments to modulate both frictional and durable liquidity to ensure that interest rates evolve in an orderly manner.

The views expressed in the Bulletin articles are of the authors and do not represent the views of the Reserve Bank of India.-PTI