In a cautious outlook for the upcoming fiscal year, India Ratings and Research (Ind-Ra) projects a decline in inflation for FY25, yet it emphasizes that immediate rate cuts from the Reserve Bank of India (RBI) are unlikely.

According to Ind-Ra, the persistent pressure of elevated food prices continues to drive inflation, suggesting that any potential reduction in interest rates will hinge on evidence of stable inflation trends nearing the RBI's target of 4 percent. As such, market participants may need to brace for a prolonged period without rate cuts in the near future.

While inflation and weak industrial activity weigh on the economy, there are positive signs in rural demand, driven by improved real wages for rural labourers in July and August 2024, and above-normal rainfall in most of the country. These factors are expected to boost consumption demand.

Devendra Kumar Pant, Chief Economist at Ind-Ra, said, "The slow growth of net taxes in 1QFY25 coupled with sticky inflation is a major challenge being faced by the Indian Economy in FY25. Rising real wages have the ability to increase consumption demand led economic growth. The situation is still evolving, and festive sales is a key monitorable for a growth revision in FY25."

Above-normal monsoon rainfall in 2024 has improved water reservoir levels, which could boost agriculture. However, weak industrial growth and declining net taxes--reaching a 16-quarter low--continue to weigh on the economy.

Actions by major economies also impact India's outlook. The US Federal Reserve's interest rate cuts and China's economic stimulus provide some relief, though tensions in West Asia could add uncertainty.

Despite recent volatility, Ind-Ra believes India's economy has demonstrated an ability to withstand shocks. Data shows that India has reached an average GDP growth above 7 per cent eleven times on a three-year average basis, with five instances since FY16, underscoring the economy's potential for high growth, albeit with intermittent slowdowns.

Manufacturing remains sluggish, with a growth rate of just 3.6 per cent for the first five months of FY25, the slowest in four years. Ind-Ra attributes this to uneven income growth, which has dampened consumer demand for certain goods.

However, positive wage growth is expected to narrow this gap between durable and non-durable consumer goods demand. A decrease in global demand has weakened India's goods exports, while imports have continued to rise.

This has led to a widening trade deficit, though strong services exports and remittances are expected to keep the current account deficit manageable. Ind-Ra projects a current account deficit of 1.0 per cent of GDP for FY25.

With improved capital inflows and India's inclusion in global bond indices, forex reserves are likely to increase. The rupee is expected to average 84.08/USD in FY25, depreciating at a slower rate than in recent years.

Overall, while there are challenges to sustaining high GDP growth, India's economic fundamentals and resilience to shocks provide a foundation for potential recovery, with improvements in wages, agriculture, and services expected to support growth.