Economic growth slowed to 5.4 per cent in the July-September period, the lowest since the October-December reading in 2022, according to official data released last Friday. With that, expansion in the country’s real GDP fell short of most economists’ expectations. It also missed the mark set by the Reserve Bank of India (RBI), which projected the growth to be at 7.0 per cent at its October policy review. 

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

The latest quarterly GDP reading came a week before the scheduled outcome of the RBI Governor-led Monetary Policy Committee’s bi-monthly review. 

What do the latest growth and inflation readings indicate about the potential course of interest rates in the country?

According to Zee Business Managing Editor Anil Singhvi, the weak Q2 GDP data was along the expected lines, given the overall muted corporate earnings for the said period. 

However, the market wizard believes that GDP growth is likely to pick up in the second half of the financial year, though the economy may close the financial year below the 7.0 per cent mark. 

Going forward, the RBI’s policy action and the central government’s course of action in terms of capital expenditure will be two important triggers to watch out for, according to Singhvi. 

ALSO READ: FY25 capex may undershoot Budget estimates, says Economic Affairs Secretary

The RBI is scheduled to conduct its bi-monthly policy review from December 4 to 6. 

In its October review, the MPC revised its policy stance to ‘neutral’ from ‘withdrawal of accommodation’ while keeping its repo rate—the key interest rate at which the RBI lends funds to commercial banks—unchanged at 6.5 per cent to “remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth”.

The RBI projects the overall GDP growth to come in at 7.2 per cent for FY25, with 7.4 per cent in the March quarter. It expects the economy to begin the next financial year with 7.3 per cent growth in the first quarter. 

While most economists agree that the slowing growth was largely priced in, some also say that it may have bottomed out at 5.4 per cent. 

The weak GDP growth is not surprising as corporate results were already implying weakness, however the government’s continued weak capex in October certainly surprises us, according to Jefferies. 

The brokerage expects the slowing government spending and a sharp decline in bank credit growth to reverse and aid growth soon, having served as key reasons behind the slowdown. 

Morgan Stanley now projects India’s GDP growth to average at 6.3 per cent for the current financial year, 40 bps below its earlier projection. 
In November, the brokerage reduced its FY25 growth projection for the economy to 6.7 per cent from 7 per cent, anticipating a recovery to levels of 6.7-6.8 per cent in the fiscal second half. 

Divided over interest rates?

Economists are divided over the timing of the expected rate cuts. 

According to HSBC, while the latest GDP reading is a “troubling print”, the RBI is believed to cut rates starting February though it could ease liquidity starting December. 

Morgan Stanley expects the central bank to keep rates steady in the upcoming policy review given the trailing inflation above 6.0 per cent. 

The RBI tracks consumer inflation primarily to formulate its monetary policy. 

It targets to contain inflation at 4.0 per cent over the medium term, with a tolerance of 200 bps on either side.

In October, consumer inflation— or the rate of increase in a basket of goods and services—worsened to 6.21 per cent from 5.49 per cent the previous month, with food inflation entering double digits, at 10.87 per cent.