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MPC's Apr repo rate decision clear as Oct-Dec growth far from robust
This story was originally published at 21:48 IST on 28 February 2025
Register to read our real-time news.Informist, Friday, Feb. 28, 2025
By Shubham Rana
NEW DELHI – As expected, the Indian economy picked up pace in Oct-Dec, but the rate of expansion marginally missed forecasts. At 6.2%, the GDP growth for the third quarter of 2024-25 (Apr-Mar) might be 60 basis points higher than 5.6% in Jul-Sept, but it does little to meaningfully lift economic sentiment and economists continue to expect the Reserve Bank of India's Monetary Policy Committee to lower the repo rate once again in April.
According to Madhavi Arora, chief economist at Emkay Global Financial Services, Friday's GDP data "makes little difference to their (RBI's) reaction function", with the second advance estimate of FY25 growth at 6.5%, only 10 bps higher than last month's first advance estimate. HDFC Bank's economists were of a similar opinion, arguing that rise in growth in Oct-Dec "is still only a moderate increase". As such, they continue to expect the RBI to cut interest rates by another 25 bps on Apr. 9 after having cut the repo rate by a similar magnitude to 6.25% on Feb. 7 to boost flailing growth in the world's fifth largest economy.
"Between now and Apr. 9, we will get February CPI inflation, which we are currently tracking at 3.8%. We expect Jan-Mar CPI inflation to sizably undershoot the MPC's 4.4% estimate, giving enough policy room to deliver another 25 bps cut in the upcoming policy meeting to be held on Apr. 9. Today's GDP release reinforces our call," Barclays' India Chief Economist Aastha Gudwani said in a note.
The third quarter saw private consumption growth rise to 6.9% from 5.9% in Jul-Sept, although growth in gross fixed capital formation cooled down to a seven-quarter low of 5.7%. Meanwhile, agriculture growth surged to a six-quarter high of 5.6%, reflecting the strong performance of rural demand.
Importantly, the rise in growth to 6.2% in Oct-Dec and the minor increase in the full-year growth to 6.5% from 6.4% come on top of sharp upward revisions in the base year periods' GDP. The real GDP for Oct-Dec 2023 is now estimated to be 1.4% greater than before in absolute terms, with the growth rate for the quarter hiked to 9.5% from 8.6%.
Similarly, the real GDP for FY24 has been estimated to be 1.5% higher, with the full-year growth rate revised upwards by a full percentage point to a stunning 9.2%.
To be sure, these numbers will undergo further revisions. However, they also underscore the eye-watering drop-off in growth in FY25, which economists think is being overestimated. The second advance estimate implies growth will jump to 7.6% in Jan-Mar. Analysts, though, see it much lower, with IDBI Bank's 'nowcast' model currently tracking fourth quarter growth at 6.4%.
The government, however, is optimistic. Chief Economic Adviser V. Anantha Nageswaran told reporters Friday that the GDP can certainly grow by 7.6% in the current quarter on account of the recent boost in tourism from the Mahakumbh Mela and strong capital expenditure by the central government. While the latter has indeed gotten off to a good start in 2025--the Centre's investments in January were up 51% year-on-year--the boost from religious travels remains to be seen.
The Monetary Policy Committee, however, may not be as easily convinced of a turnaround. The minutes of the Feb. 5-7 meeting of the committee showed its members were so worried that they were willing to give growth "higher weight...in our policy setting". External member Nagesh Kumar even countenanced a 50 bps rate cut. Growth, clearly, is far from potential.
Earlier in the day, the World Bank said that for India to achieve its target of becoming a high-income nation by 2047, it needs to accelerate the reform process and grow at 7.8%, on average, for the next two decades or so. With GDP growth having averaged just 6.1% in the 13 years starting FY13, every little move by the MPC will matter. End
Edited by Ashish Shirke
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