Home >Politics >Policy >Rebound in GDP growth rate gives RBI ammunition to hold rates

Mumbai/New Delhi: India’s economic growth bounced back from a three-year low, giving the central bank enough ammunition to keep interest rates on hold on 6 December amid an uptick in inflationary pressures.

Gross domestic product (GDP) in Asia’s third-largest economy expanded 6.3% in July to September from a year earlier, the statistics ministry said in a statement in New Delhi on Thursday. That’s slower than the 6.4% median estimate in a Bloomberg survey of 51 economists but faster than 5.7% in the previous quarter. Gross value added, a key input of GDP that’s tracked by the central bank, rose 6.1% compared with an estimated 6.2% gain.

It comes as good news for Prime Minister Narendra Modi who is facing elections in his home state of Gujarat on 18 December. He has been grappling with slowing growth in the past five quarters, with the economy dragged down by subdued private investments, an unprecedented cash ban imposed last year and the introduction of a country-wide consumption tax in July.

“After five quarters we are seeing a reversal—it is very encouraging," T.C.A. Anant, the government’s chief statistician told a press conference in New Delhi. He added the manufacturing sector had led the recovery as the impact of the new goods and services tax began to wane. The tax had hit entire supply chains with costs for businesses jumping, hurting sentiment.

Data showed manufacturing GVA rose 7% in July-September from a year earlier, while trade, hotel and similar services rose 9.9%.

Thursday’s data underlined that a nascent recovery is taking place and expectations are building that private investments will pick up next year after a landmark proposal to recapitalise struggling state-run banks. That may unclog bank credit to industry and lead to higher investment growth.

Encouraging trend

“Looks like India’s turning a corner," said Devendra Pant, chief economist at India Ratings & Research.

“And although we believe there is some effect of the low base of last year’s second quarter, the growth trend in core GVA—that’s excluding state and farms’ spending—is very encouraging. There seems to be some restocking after GST and manufacturing is doing relatively well. This trend needs to be nurtured."

RBI on hold

An acceleration in growth is expected to prompt Reserve Bank of India (RBI) governor Urjit Patel to be more hawkish in next week’s rate review. The benchmark rate is at its lowest in seven years, while consumer price inflation has surged to a seven-month high, inching towards the central bank’s medium-term target range of 4%.

Along with expectations that inflation will rise given the hardening in global crude oil prices, there are growing concerns that the government may have to borrow more to plug any fiscal slippage due to slowing revenues. This has driven government bond yields higher in the past few months.

“Today’s data points rule out any policy rate reduction in December," said Rupa Rege Nitsure, chief economist at L&T Finance Holdings Ltd. “The RBI will be duly worried about worsening fiscal position and hardening of crude oil and other mineral prices. However, they will not raise the rates soon as overall investment sentiment is still weak."

Bloomberg Economics analyst Abhishek Gupta, however, says unless the RBI eases policy soon, investments are unlikely to pick up.

“One one hand we have structural reforms, which are pointing to potential growth and one the other, RBI’s tight monetary policy is holding back consumption and investment," Gupta said. “We expect the RBI to cut rates in December and switch to an accommodative stance." Bloomberg

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