Weak GDP Growth Intensifies Chorus on Rate Cuts

India’s first quarter GDP growth slips to 7% from 7.5% in the previous quarter; pressure on RBI to cut rates mounts

All Eyes on RBI

• India’s GDP growth slips to 7% in Apr-June quarter from 7.5% in the previous quarter
• India’s growth rate matches that of China, which is in the midst of an economic slowdown
• Weak growth may strengthen expectations of a rate cut
• Govt has already been arguing for an immediate rate cut of 50 bps in the main policy rate

India first quarter (April-June) GDP growth slowed more than expected, which may intensify the call for a cut in interest rates.

This comes just as finance ministry officials in New Delhi had begun to sound increasingly optimistic on taking over the baton of global growth from China as the latter faces the prospect of a severe economic slowdown.

In a signal that the economy is struggling to gather steam, government data on Monday showed the growth in gross domestic product (GDP) fell to 7%, matching the growth rate of China, but falling short of economist expectations of 7.5%. The growth rate was also slower than the provisional data of 7.5% recorded in the previous quarter.

There’s a lot of emphasis that’s being put on the opportunities that lie ahead for India and not too much attention is being paid to the challenges that remain today.
— Jyotinder Kaur, Principal Economist, HDFC Bank

Stalled Reforms Weigh?

This is also a setback for the Narendra Modi government, which has been struggling to pass important legislation, with key reforms either stalled in Parliament or delayed.

We need to move this (GDP) figure up given the imperative of employment generation.
— Jyotsna Suri, Head, FICCI

Weak Growth to Fuel Rate Cut Chorus

The latest data will also strengthen the calls from the government for a rate cut. Finance Ministry officials are already arguing for an immediate cut of as much as 50 basis points in the Reserve Bank of India’s (RBI) main 7.25% policy rate.

The RBI has cut the policy repo rate 75 basis points so far this year. But it left the rate on hold at its last policy review in early August.

In our view, (it) clearly paves the way for two more repo rate cuts before the close of the financial year.
— Jyotinder Kaur, Principal Economist, HDFC Bank

While the RBI Governor Raghuram Rajan has not ruled out further monetary easing, he has tied future rate cuts to the inflation outlook.

Many in the government are now worried that growth could slip below the official target of 8 to 8.5% for the year to March, and see the RBI’s caution as worsening the situation.

(With inputs from Reuters)