Indian economic growth accelerates in Q1 FY2019 to highest in over two years, RBI to stay on hold through 2018

Indian economy growth accelerated to the highest in over two years in the June quarter. In the first quarter of fiscal year ending March 2019 (FY 2019), the GDP grew 8.2 percent year-on-year following the growth of 7.7 percent seen in the prior quarter.

Private consumption growth came in at 8.6 percent year-on-year, the highest since the demonetisation quarter. Government consumption growth continued to be relatively high. This was also seen in the public services’ GVA growth of 9.9 percent year-on-year.

Following a strong growth, investment growth eased in the quarter to 10 percent from 14.4 percent recorded in the prior quarter. Investment is believed to be largely driven by public infrastructure spending, noted ANZ in a research report. Private investment continues to be inhibited by tighter financial conditions, in spite of a recent rebound in capacity utilization rates. Exports recorded a growth of 12.7 percent, ensuring that net exports constitute a smaller drag on growth that in recent quarters.

Manufacturing GVA growth came in at a two-year high of 13.5 percent year-on-year, adding 2.3 percentage points to GVA growth. Nevertheless, this is slightly at variance from the message from industrial production data, which has been relatively weaker. Moreover, agriculture GVA growth affirmed to 5.3 percent year-on-year from previous quarter’s 4.5 percent.

“Looking ahead, our FY2019 GDP forecast of 7.1% faces upside risks, even if the Q1 figure is revised down somewhat. Consumer spending growth will likely temper, but remain robust”, stated ANZ.

Rural demand is expected to rebound with monsoons having been fairly stable in major crop-growing regions. Two-wheeler sales have continued to stay strong through July. However, the impact of higher Minimum Support Prices is unclear as yet. Private investment is expected to be tepid as a result of lending constraints in the banking sector. Inflation is expected to be weak in the next few months before resuming their upward trajectory in the fourth quarter of FY2019. Thus, the need to follow through with further hikes continues to be low, in spite of the solid growth outcome.

“Accordingly, we continue to expect the RBI to stay on hold through 2018 with a 25bps hike likely in February 2019”, added ANZ.