Indian economic growth accelerates sharply in Q4 FY2018, RBI likely to hike interest rate by 50 bps in 2018

Indian economic growth accelerated sharply in the first quarter of 2018 (Q4 FY2018). The GDP grew 7.7 percent on a year-on-year basis, an acceleration from 7 percent in the prior quarter. The economic growth was mainly driven by government consumption and public infrastructure spending.

Investment saw a growth of 14.4 percent year-on-year in the quarter, thanks to a step-up in public infrastructure spending. This was also seen in the constructive GVA which saw a growth of 11.5 percent year-on-year during the quarter. The same rate of growth in investment is unlikely, unless private investment rebounds, noted ANZ in a research report.

The role of fiscal policy was also clear in government consumption data that saw a growth of 16.8 percent year-on-year. Private consumption also rebounded, rising 6.7 percent in the quarter. This marked the first rebound in private consumption after four straight quarters of moderation.

The growth in GVA was widespread led by public administration, which saw growth of 13.3 percent year-on-year. Manufacturing and agriculture sector also recorded growth.

For the whole of fiscal year 2018, Indian economic growth decelerated to 6.7 percent from 7.1 percent. The moderation in growth was driven by impacts from successive policy shocks of demonetization and the Goods and Services Tax; and the twin balance sheet problem of high corporate leverage and banks’ stressed balance sheets. India’s growth performance in the third quarter and fourth quarter implies that these shocks have worn off considerably, stated ANZ.

“Looking ahead, our FY2019 GDP forecast of 6.9 percent clearly faces upside risks. Rural growth is expected to recover if the monsoon turns out to be normal, as forecast”, stated TD Economics.

Higher frequency data such as auto sales, consumer lending, and corporate sales imply that private consumption is expected to bolster further. But private investment is not expected to boost growth significantly over the next few quarters, given the high level of slack capacity and lending constraints in the banking sector.

“Accordingly, we expect the Reserve Bank of India (RBI) to raise its policy repo rate by 50bps in 2018 with the first hike of 25bps at their meeting next week”, added ANZ.

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