New Delhi / Mumbai: The Indian economy expanded 7.9% in the first quarter (April-June) of the current fiscal year—the lowest since the third quarter of 2004-05—compared with 9.2% a year ago, confirming the general apprehension that growth is slowing down.
Data on the gross domestic product, or GDP, growth rate, released by the Central Statistical Organisation (CSO) on Friday, however, didn’t hurt the stockmarkets. The Bombay Stock Exchange’s benchmark Sensex index gained more than 500 points, equivalent to 3.67%, to close above 14,546. At the National Stock Exchange, the Nifty index gained 3.4% to reach 4,360.
According to brokers and analysts, stocks gained largely because investors had anticipated a low growth rate.
SLOWING DOWN (Graphic)
The positive trigger from the US markets, which rose on Thursday, also helped local buying sentiments on Friday. A drop in inflation rate based on the Wholesale Price Index, released after market hours on Thursday, too, came as a positive for the markets.
Inflation accelerated at 12.4% for the week ended 16 August, compared with 12.63% the previous week.
Lower inflation served to lift investors’ spirits, said Anita Gandhi, head of institutional business at Arihant Capital Markets Ltd. “Investors were expecting inflation to cross 13% this week,” she said. “This rally could continue for some more days.”
The CSO data showed the farm sector grew 3%; industry, along with the construction sector, expanded 6.8% and the services sector 10%. Economists said these numbers were broadly in line with their expectations for GDP, which measures a nation’s total income and output.
“...the worrying part is the poor performance of the electricity, gas and water supply sector, which grew at only 2.6%. As there are already supply-side constraints to growth, a poor show by this sector doesn’t augur well,” said Dharmakirti Joshi, principal economist with credit rating agency Crisil Ltd. Apart from the industrial sector, the services sector also showed moderation in growth, mainly due to a slowdown in the financial sector, which grew 9.3% compared with 12.6% last year.
“This is due to a slowdown in credit growth which came down to around 22% in the first quarter from more than 30% in 2007-08. This sector has certainly shown some loss of momentum,” HDFC Bank’s chief economist Abheek Barua said.
The Reserve Bank of India (RBI) has been making bank credit dearer since 2006. It raised the key repo rate, at which it lends overnight to commercial banks, four times in 2006 and twice in 2007.
In 2008, it increased the repo rate by 1.25 percentage points in three moves to 9%, raising borrowing costs in an attempt to cool inflation.
However, economists don’t expect growth to come down significantly from the current level. “Growth could be more hit next fiscal year due to the recent credit tightening that will affect growth with a lag,” Joshi said. Crisil expects GDP to grow 7.8% this fiscal year.
The Prime Minister’s economic advisory council in its economic outlook said GDP will grow 7.7%.
A local research unit of Citigroup Inc., meanwhile, lowered its growth forecast for India for this fiscal year from 7.7% to 7.5%, after taking into account the latest monsoon and crop sowing data.
On further monetary tightening by the RBI, HDFC Bank’s Barua said: “I would assign lower probability of any rate hike in October.”
Joshi said it would be a difficult task for RBI to maintain a balance between growth and inflation with growth slowing down. “Any further monetary tightening has to be very carefully thought out.”