Indian Q2 growth below expectations, recovery signs emerge: SBI CAPS
- The Q2 GDP slowdown stems from monsoon disruptions, subdued government spending, weakening urban demand and a lending slowdon, SBI CAPS said.
New Delhi: The Indian economy faced a sluggish start to FY25, with Q2 GDP growth falling below expectations due to monsoon disruptions, subdued government spending, weaker urban demand and a slowdown in lending, SBI CAPS said in a report on Monday.
But it also highlighted improvements in high-frequency indicators like auto sales and fuel consumption in October-November 2024, signalling the prospects of a recovery in the second half of the fiscal year.
“The Q2 GDP slowdown stems from four key factors: monsoon disruptions hitting industry (industry GVA at a 7-quarter low of 3.6% y/y), subdued government spending stalling capex, weakening urban demand curbing consumption, and lending slowdown due to RBI norms,” it said.
The report titled FY25 - A tale of two halves or one of full despair? however warned that external volatility remains a risk, and is expected to have a major impact in FY26.
SBI CAPS is a wholly-owned banking subsidiary of the State Bank of India (SBI).
"The US President-Elect's comments on tariffs and de-dollarization have sparked debate, but market volatility has remained subdued. However, a few emerging market currencies are already feeling the heat," the report said.
"Even as the US faces risks from imported inflation, and China is ramping up stimulus, market stability is expected to hold for now. We anticipate volatility will pick up once Mr Trump takes office in Jan’25 and his policies begin to unravel," it added.
India’s real GDP grew by 5.4% in the September quarter, the slowest in nearly two years, due to a slowdown in manufacturing, urban consumption and low corporate earnings, showed the MoSPI data released last month.
Gross value added (GVA), which measures the total value of goods and services produced in an economy, grew by 5.6% in the September quarter, down from 7.7% in the same period last year.
GVA growth in the first quarter was 6.8%.
On the expenditure side, private final consumption expenditure, a proxy for private consumption, stood at 6% annually in the September quarter, down from a seven-quarter high growth of 7.4% in the preceding first quarter but above the 2.6% growth registered a year earlier.
Gross fixed capital formation slowed to 5.4% annually in Q2 from 11.6% in the year-ago period and 7.5% in the latest first quarter, indicating a slowdown in investments.
However, India’s petrol consumption rose by 8.3% annually in October 2024 to 3,401 thousand metric tonnes, according to data from Petroleum Planning and Analysis Cell.
Retail sales of vehicles across categories in India grew by 11.21% annually to 3.2 million units in November.
"Despite growth undershooting projections, the RBI is likely to hold the repo rate steady in the Dec’24 policy, prioritising inflation control and external stability," the report said.
"With CPI back above 6% y/y and the INR hitting record lows amid USD showing strength, liquidity pressures have mounted. The sharp decline in forex reserves and volatile FII flows will likely lead the RBI to a wait-and-watch approach towards US Fed policy actions while aiming to maintain a reasonable interest rate differential," it added.
Retail inflation based on the consumer price index (CPI) hit 6.21% in October, a 14-month high, driven by surging food prices, breached the Reserve Bank of India's (RBI) medium-term target of 2-6% for the first time in over a year.
The six-member Monetary Policy Committee led by RBI Governor Shaktikanta Das kept the benchmark repo rate unchanged at 6.5% for the eleventh straight meeting last week.
Meanwhile, stating that a stronger H2, FY25 may be on the horizon though continued vigilance is necessary, the report said the RBI faces constraints on cuts due to persistent inflation and exchange rate pressures.
"As growth slows, expectations for a Feb’25 rate cut have realigned, with ample liquidity expected in the interim. The 10-year Union G-sec Yield is likely to remain in the 6.5%-7.0% range, influenced by global factors," the report said.
"We believe the RBI and Union have sufficient tools to stabilise the economy, especially in FY26 when the risks are likely to peak," it added.
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Business NewsEconomyIndian Q2 growth below expectations, recovery signs emerge: SBI CAPS
First Published:9 Dec 2024, 11:32 PM IST
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