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Informist, Friday, Nov. 29, 2024

 

By Shubham Rana

 

NEW DELHI – The GDP data for Jul-Sept released Friday has only corroborated what economists have been saying for a while: the Indian economy is slowing down more than the authorities think. But not even the most pessimistic of the naysayers had predicted the Indian economy would expand by a mere 5.4% in the second quarter of 2024-25 (Apr-Mar).

 

The latest quarterly GDP data has certainly caught the government by surprise, with Chief Economic Adviser V. Anatha Nageswaran on Friday scrambling to limit the damage, saying that while the data was "disappointing", the situation wasn't "alarming". The question now is what the Reserve Bank of India thinks.

 

The Indian central bank has been rather bullish about the economy's prospects, forecasting a GDP growth rate of 7.2% for FY25. It is safe to say that the forecast now lies in tatters: for the number to be met, the GDP must grow by 8.3% in the second half of the year, calculations show. Even the RBI is currently projecting a growth rate of 7.4% in the final two quarters.

 

For Jul-Sept, the RBI had predicted a growth rate of 7.0%, with Governor Shaktikanta Das saying on multiple occasions since the start of October that while economic data has been "mixed", the positives outweigh the negatives. This assessment has allowed the central bank's Monetary Policy Committee to remain focussed on lowering inflation and leave the repo rate unchanged at 6.50% for the better part of two years. Could the growth-inflation balance tilt somewhat at the MPC's meeting next week?

 

"Eventual (GDP growth) print of 5.4?ing lower than the market expectation would likely put the RBI in a fix and goes against their narrative of a strong growth that required no monetary policy support," Kunal Kundu, India economist at Societe Generale, said. "There is now an increased likelihood of a policy rate cut by the RBI during its meeting next week," Kundu added.

 

The sharp increase in inflation in September and further in October to a 14-month high of 6.21% extinguished all hopes of a rate cut in December sparked by the MPC's decision to loosen its stance to neutral in October. Economists even started looking at April as the next possible opportunity for a rate cut after extremely hawkish comments by Das last month when he warned that a rate cut at the current juncture would be risky and premature.

 

GROWTH NEEDS IMPETUS

The government, meanwhile, has openly called for lower interest rates, with Commerce Minister Piyush Goyal earlier this month saying it was "flawed" for the monetary policy to focus on food inflation. More interestingly, Goyal said "growth needs a further impetus".

 

Even the RBI itself has admitted that growth has been curbed by its monetary policy actions. In a paper co-authored by Deputy Governor Michael Patra, the central bank's staff said the MPC's repo rate hikes of 250 basis points since May 2022 had helped bring down both growth and inflation by 160 bps.

 

The future is not bright either, with ICRA Chief Economist Aditi Nayar saying the outlook for the second half of FY25 is now "decidedly mixed", thanks to the impact of a slowdown in personal loan growth on urban consumption and spillovers from geopolitical and tariff-related developments on commodity prices and external demand.

 

"The GDP miss in Jul-Sept makes the ask rate very high in Oct-Mar for us to even reach 6.5%--our earlier FY25 forecast," said Madhavi Arora, chief economist at Emkay Global Financial Services. Analysts from Barclays and IDBI Bank, meanwhile, have both already cut their full-year growth forecast by 30 bps to 6.5%.

 

The path to lower interest rates, however, is not straightforward as it goes through inflation, which remains high. “While we expect the RBI to keep the policy rate unchanged at its meeting next week, the possibility of a move in the February policy for a rate cut has increased," HDFC Bank Principal Economist Sakshi Gupta said.

 

The shift from the Indian economy being in the 'goldilocks' stage to one where growth has slumped and inflation risen has been rapid. While the RBI has actively warned about the latter, it might be time for it to take cognisance of the former.  End

 

Edited by Akul Nishant Akhoury

 

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