Growth slowdown prompts calls for monetary measures by the central bank

The GDP rose by 5.4% in the September quarter, showed the MoSPI release on November 29, the lowest level since Q4FY22, and lower than RBI's projection of 7% for Q2FY25.

The slowdown in the second quarter economic growth has put the outlook for FY25 at risk, as well as prompted questions over whether the central bank will step up with measures to boost liquidity or lower lending rates.

In conversation with CNBC-TV18, economists said they do not expect a rate cut in the December policy meeting of the MPC, however, some measures on the CRR front cannot be ruled out.

The GDP rose by 5.4% in the September quarter, showed the MoSPI release on November 29, the lowest level in seven quarters and lower than RBI's projection of 7% for Q2FY25. Weakness in the second quarter growth rate was led by manufacturing and mining.

ICRA's Aditi Nayar said the disappointing growth numbers imply that one can expect a miss on the government capex front in the range of Rs 1 trillion for the full year. She sounded hopeful of a 'positive impact' of the normal monsoon likely to be visible in agriculture growth rate during the second half of the year. On possible central bank action in light of these growth numbers, Aditi said, she expects a 'status quo in December and higher likelihood of a rate cut in February.'

Sakshi Gupta of HDFC Bank said the extent of slowdown in the second quarter growth rate shows a downside risk to the full-year growth forecast for the economy. The slowdown in domestic consumption, investment growth, global weakness in demand were three factors that weighed on the Q2FY25 growth figure, she added. Sakshi Gupta is of the view that the RBI may keep the policy rate unchanged in December, but the chances of a rate cut in February has gone higher.

Sakshi Gupta added that RBI moving on interest rates in December is not likely, in her opinion, as households are now more vulnerable to changes in interest rates, given the leveraged consumption that is visible now.

Deutsche Bank's Kaushik Das said one needs to now think if there is any case for a policy support, or if this growth miss was a one off. The weakness in growth is more than what we had anticipated, said Kaushik Das, adding that it is unlikely that the government capex will meet the budgeted target of Rs 11.1 trillion.

Kaushik Das also said that RBI will also need to assess if it sees the July-September period as a temporary slowdown, and after that the growth goes back to 7%, hence not requiring any panic to cut rates. "You start with the liquidity transmission, so you have changed the stance to Neutral. The next stage should be a CRR cut and you bring the liquidity back into the system, and then follow through with a rate cut in either February or April..," Kaushik Das added.

The GDP miss in Q2FY25 makes the ask rate very high in the second half for us to even reach 6.5% - our earlier FY25 forecast, said Madhavi Arora, Economist at Emkay. The last 3-6 months have seen a 'pronounced fall' in urban consumption demand, and one may now see private consumption being a 'missing agent' for some time, she added.

The next Monetary Policy Meeting is scheduled on December 6. The latest growth numbers also weigh on Reserve Bank's forecast of 7.2% GDP for FY25.

Read More: GDP growth moderates in Q2, but early signs of rebound seen in second half

Goldman Sachs has already projected the GDP growth for FY25 to slowdown to 6.3%, in its latest review earlier in November.

S&P Global Ratings too had revised down its estimate for India’s GDP growth for the next two financial years. The rating agency projected a 6.7% GDP growth rate for FY26 and 6.8% for FY27, lower than its previous projections.