The Reserve Bank of India (RBI) has noted that the ceasefire in West Asia provides a temporary relief to the global economy, but cautioned that downside risks to the global outlook have intensified while upside risks to inflation have also grown. This assessment, part of the RBI's latest State of the Economy report, signals a more fragile balance for the Indian economy.
Domestic Economic Activity Shows Mixed Signals
The report adopts a calibrated tone on domestic conditions, stating that economic activity displayed resilience in many segments while a slowdown was observed in others. Early signs of deceleration are becoming visible, and high-frequency indicators present a mixed picture. Demand conditions remained resilient despite some pockets of slowdown, with GST collections indicating sustained consumption.
However, business surveys reveal that cost pressures and uncertainty have taken a toll on new orders and output. The Purchasing Managers' Index (PMI)-based output growth has slowed to its weakest pace since mid-2022, reflecting a cautious business environment.
Forward-Looking Indicators Suggest Caution
Forward-looking indicators point to a more cautious outlook. The RBI's surveys indicate softening consumer confidence and a moderation in business optimism, along with a buildup of cost pressures. These factors suggest that demand may lose momentum in the coming months, posing challenges to economic recovery.
HSBC Downgrades India Further
In a separate development, HSBC has downgraded Indian equities to underweight from neutral, marking the second downgrade within a month. The move comes as analysts expect the economy to face inflationary pressure from rising petroleum product prices after the state elections. There is also a possibility of a slowdown in foreign flows due to the sharp depreciation of the rupee. To balance this downgrade, HSBC analysts upgraded Korea to neutral from underweight. They stated that the relative case for Indian equities has weakened as headwinds erode India's standing versus the rest of the region.
