JUNE 2025

The Reserve Bank of India’s Annual Report is out. 

Strangely, it didn’t make major headlines, despite being a document of immense consequence. 

In this column, ExpertX attempts to unpack the report, simplify its key messages, and reflect on what it says about the past, present, and future of the Indian economy.

• भारत का वृद्धि भ्रम:  रिज़र्व बैंक का लाभ, वास्तविक अर्थव्यवस्था का दर्द 

The headline from this year’s report is striking: the RBI has transferred a record ₹2.6 lakh crore as surplus to the Government of India, a 27% year-on-year jump.

This is not just the highest such transfer in RBI’s history; it is also a valuable lens through which we can examine India’s macroeconomic health, public finances, and its place in a shifting global economy.

But this transfer is not merely a statistical outlier, it reflects a structural shift in the RBI’s cost and income management, both domestic and global. 

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...The RBI has transferred a record ₹2.6 lakh crore as surplus to the Government of India...

The central bank’s interest income from foreign securities rose due to higher global yields, especially from U.S. treasuries. Domestically, government borrowing at elevated rates helped boost RBI's returns on Indian securities.

However, the largest contributor to the surplus was the revaluation of assets particularly foreign exchange reserves. 

As of March 2025, India’s forex reserves stood at $651 billion, up from $578 billion the previous year, a $73 billion jump. Much of this gain came from the depreciation of the rupee against the U.S. dollar.

Technically, these are accounting gains, not trade surpluses or business profits. But since they accrue to the RBI’s balance sheet, they are valid and legitimate transfers.

Behind the Headline Growth

While the surplus transfer is eye-catching, the real economy presents a more nuanced picture. According to the RBI, India’s real GDP growth slowed to 6.5% in FY25, down from 7.2% the previous year, a 7.7% relative drop.

Still, India remains one of the world’s fastest-growing large economies. In absolute terms, it is now the fourth-largest economy globally by GDP size. 

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Much of this gain came from the depreciation of the rupee against the U.S. dollar.

But this says little about the quality of growth or the per capita wealth of its citizens.

As economists often remind us, GDP is a flawed metric. It only reflects the volume of goods and services transacted, not the value added to lives. 

Even mass deforestation or disaster rebuilding adds to GDP, though they may hurt long-term well-being.

Thus, while Indians may take pride in GDP growth, it comes with a pinch of salt.

Consumption, Rural Resilience, and Urban Austerity

Private and public consumption show a mixed picture. Private consumption grew faster than GDP at 7.6%, thanks largely to a strong rural economy supported by an abundant monsoon. 

Higher agricultural output, both Kharif and Rabi, boosted rural incomes, leading to greater demand for two-wheelers, tractors, and FMCG goods.

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 ...While Indians may take pride in GDP growth, it comes with a pinch of salt...

Urban consumption, however, remained muted. High interest rates, stagnant real wages, and global uncertainty meant that the upper-middle-income segments were cautious with discretionary spending.

Curiously, even though corporate balance sheets are strong, wage growth has been restrained. Firms, wary of global headwinds, have held back on increments and bonuses. 

This has created a disconnect between macro numbers and household-level optimism, especially in urban areas.

Government Spending and Investment Slowdown

Government expenditure has slowed dramatically, from 8.1% to 3.8%, indicating a phase of fiscal consolidation. 

Some of this could be electoral strategy, as non-election-bound states have seen slower spending, a politically selective fiscal push.

More concerning is the decline in capital formation. 

Foreign Direct Investment (FDI) fell by 8%, pressured by tight global financial conditions and geopolitical uncertainty in the Middle East and Eastern Europe.

What’s puzzling is the simultaneous weakening in domestic investment. Capital goods production grew only 6.1%, two percentage points below last year, a sign of subdued business confidence. 

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Credit goes to India’s farmers, whose relentless toil underpins this performance 

While some cite high interest rates, such small changes shouldn’t deter capital-intensive sectors like construction and manufacturing in a fast-growing economy.

In contrast to a cooling industrial sector, agriculture has outperformed, buoyed by good rainfall. Total food grain output crossed 330 million tonnes, a record.

Credit goes to India’s farmers, whose relentless toil underpins this performance. 

The Minimum Support Price (MSP) policy, guaranteeing a 50% margin over input costs, has also supported rural income and confidence, though the number of beneficiaries remains limited.

• भारत का वृद्धि भ्रम:  रिज़र्व बैंक का लाभ, वास्तविक अर्थव्यवस्था का दर्द 

Looking ahead, global disturbances particularly on India's western frontier could impact tourism, foreign inflows, and services exports.

The report notes a marginal improvement in labour force participation, driven by rising female participation. 

Urban unemployment has fallen below 6%, but rural unemployment has risen, largely due to cuts in MGNREGA funding the lifeline for rural jobs. 

The rationale behind these cuts remains unclear and appears to carry political undertones.

Inflation and Sectoral Drifts

Inflation has declined marginally to 4.6%, close to RBI’s comfort zone of 4%. However, food inflation remains volatile, depending on seasonal supply. 

Meanwhile, sluggish capital formation, weak FDI, and cautious manufacturing have helped temper inflation, though for the wrong reasons.

• भारत का वृद्धि भ्रम:  रिज़र्व बैंक का लाभ, वास्तविक अर्थव्यवस्था का दर्द 

The construction sector, despite moderate growth, has added more to GDP than at any point since 2012. Yet, a 2% decline signals a slowdown, likely driven by weak steel and cement demand, and declining housing sales.

New housing projects are also down, hinting at a looming price rise in future due to supply constraints. Real estate volatility is likely to continue for the next 2–3 years.

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New housing projects are also down...

Globally, we are in a turbulent phase. 

The IMF projects 2.8% global growth, but trade tensions, especially from potential U.S. tariffs under Trump-era policies, war in Eastern Europe, and energy crises, all contribute to a fragile outlook.

In this volatile context, the digital rupee is a noteworthy RBI innovation. While retail adoption is still minimal, the three-fold growth in circulation is driven by banking and fintech use. 

Encouragingly, schemes like Odisha’s Subhadra Yojana, delivering benefits via e-rupee wallets, show early promise.

One rising concern is the surge in gold-backed loans. Many rural households, facing financial stress, are mortgaging gold for quick cash. 

This practice reveals a distress signal, both culturally and economically.

RBI has proposed a uniform 75% loan-to-value cap, along with stricter documentation. 

• भारत का वृद्धि भ्रम:  रिज़र्व बैंक का लाभ, वास्तविक अर्थव्यवस्था का दर्द 

But over-regulation risks pushing borrowers back into the arms of informal moneylenders, a backward step for financial inclusion.

Selling or mortgaging gold has traditionally been seen as a last resort in Indian households. Its growing prevalence should worry policymakers.

RBI’s Institutional Strength: Past, Present, Future

The RBI’s surplus transfer model is relatively new, formalized only in the past decade. 

Under governors Raghuram Rajan and Urjit Patel, there was resistance to using RBI reserves for bridging fiscal deficits. The disagreement even led to Patel’s exit in 2018.

Following this, the Bimal Jalan Committee introduced the Economic Capital Framework, which set rules for surplus transfers and reserve buffers. 

In 2024–25, the Contingent Risk Buffer (CRB) was adjusted to a range of 4.5–7.5% of the balance sheet.

As India marches toward its $5 trillion economy ambition, the RBI continues to play a crucial, stabilizing role.

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Selling or mortgaging gold has traditionally been seen as a last resort in Indian households

In times of crisis, it is institutions not slogans, that carry nations forward. Just as the U.S. 

Federal Reserve helped manage the fallout of the 2008 crisis, India needs a robust, independent RBI now more than ever.

Cautious Optimism, Not Celebration

This year’s RBI report reflects cautious optimism, not celebration. 

The surplus transfer is impressive, but beneath it lie deeper tensions, slowing growth, muted investment, fragile rural employment, and cautious private spending.

It’s a reminder that even as numbers rise, we must ask: who benefits, who is left behind, and what kind of economy are we really building?

India’s future depends not just on how much we grow, but how fair, inclusive, and sustainable that growth turns out to be.