Indian GDP growth rebounds in December quarter, RBI likely to maintain policy rate at 6 pct through 2018

The Indian economic growth accelerated sharply in the third quarter of the fiscal year ending March 2018. The GDP growth accelerated to 7.2 percent year-on-year from 6.5 percent year-on-year previously. The divergence between the GDP and GVA growth is partially on account of higher indirect taxes in the December quarter and lower GST refund payouts.

However, the upside surprise was mainly because of an impressive performance in investment demand, which recorded a growth of 11.9 percent year-on-year. The solid investment print is likely driven by traction in government infrastructure spending. Similar performance in investment is not expected to be sustainable unless private investment recovers, noted ANZ in a research report.

On the contrary, private consumption dropped sharply to 5.6 percent year-on-year from 6.5 percent in the earlier quarter, marking the fourth straight quarter of moderation. Private consumption demand is being restricted by tepid income growth in both urban and rural areas. Corporate earnings data indicate towards flat wage growth. Induced by increased imports, net exports also proved to be a drag on the overall economic growth, stated ANZ.

The rebound in GVA was led by stronger industrial activity and higher than expected growth in agriculture sector. Manufacturing GVA recorded a healthy growth of 8.1 percent year-on-year in the third quarter on the top of 6.9 percent year-on-year growth in the earlier quarter. The services sector also rose to 7.7 percent year-on-year from 7.1 percent year-on-year largely because of higher spending in public administration.

“The risks to our FY2018 GDP forecast of 6.2 percent are on the upside based on strong performance in Q3. Looking ahead, our FY2019 GDP forecast of 7.2 percent faces downside risks”, said ANZ.

This is mostly due to tighter norms that have been introduced for the resolution of stressed assets. The measure might lead to a rise in non-performing assets, as banks will be compelled to reclassify restructured loans as NPAs. This would likely delay a rebound in credit and investment by implication.

“Taking into consideration the above factors and the evolving inflation trajectory, we expect the RBI to maintain its policy repo rate at 6.00 percent through 2018. However, we believe that the strong rebound in growth will only add to the hawkish rhetoric of the central bank”, added ANZ.

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