India’s Q2 GDP growth beyond expectations, RBI may opt for a hawkish stance

Barclays, Citi raise India’s growth closer to 7% after GDP beat

India’s gross domestic product (GDP) growth for the July-September FY24 quarter is beyond expectations, economists said. India’s July-September 2023 GDP growth stood at 7.6 percent versus 6.2 percent in July-September 2022. Economists added that with this GDP growth, the Reserve Bank of India (RBI) would opt for a hawkish stance in its coming monetary policy committee (MPC) announcement on December 8.

“The GDP growth surprised on the upside printing at 7.6 percent in Q2. Industry growth outperformed supported by domestic demand and lower input costs, while the service sector is showing some early signs of moderation. The GDP print does pose an upside bias for our full-year forecast of 6.5 percent. We expect the RBI to remain hawkish at the upcoming policy as growth continues to show strength while inflation risks linger on,” said Sakshi Gupta, Principal Economist, HDFC Bank.

Madhavi Arora, lead economist, Emkay Global Financial Services said that the growth is being underpinned by cyclical factors like robust corporate profits, strong fiscal impulse aided by government spending in a pre-election year, and a healthy financial sector, led by easier lending standards and higher credit growth.

“The structural factors like deflator issues in growth accounting may have also augured well for the print,” Arora said.

Also read: India Q2 GDP: July-September growth at 7.6%, sharply above forecast

The GDP growth is higher than the Reserve Bank of India (RBI) prediction of 6.5 percent. The surprise growth came in the backdrop of healthy domestic consumption and strong growth in the services sector.

According to a Moneycontrol survey of 17 economists, India's GDP growth was expected to decline to 6.8 percent in July-September from 7.8 percent the previous quarter amid robust consumption and capital expenditure continuing to support economic activity.

"Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank said: "The CPI inflation came in line with our expectations. The moderation provides some relief, especially as the core inflation has remained comfortable. However, we expect the trend of sub-5 percent headline inflation to remain brief with most of FY24 ahead likely to remain above 5 percent. Overall, we continue to expect the MPC to remain on a extended pause phase in rates with liquidity being used as a more frequent tool to manage the stance."

While the latest GDP print is well above economists' expectations, the government and the RBI had been warning of a good surprise. On November 29, Economic Affairs Secretary Ajay Seth said that he anticipates a "good" GDP growth number for the second quarter of 2023-24. Before that, RBI Governor Shaktikanta Das, on October 31, had remarked that the July-September growth rate could be a positive surprise.

"The second-quarter GDP number, which will be released at the end of November, will likely surprise... looking at the momentum of economic activity, considering a few early data points and indicators, I can say that the second-quarter GDP number, when released, will probably surprise everyone on the upside," Das said.