India’s gross domestic product recorded a sharp 13.5 percent growth during April-June period from the level a year back.
While the growth was lower than 15 percent that economists had expected, it was the second-highest surge India has ever clocked, although the comparable quarterly GDP data is available going back only till 2012.
So what does the data mean for our economy and the policy prospects going ahead?
What drove spike in GDP?
It's the base effect and a rebound in services.
Remember, during April-June 2021, India was in the midst of the deadly second wave of the Covid-19 pandemic which had led to a sharp contraction in economic activities. The normalisation of activities since then has pushed up the GDP numbers compared with the low base of last year.
Meanwhile, private consumption has revived with support from contact-intensive services, which had also bore the brunt of pandemic. Agriculture growth has also been robust despite the heat wave’s impact on wheat output. In all, the economic recovery is broad based, with all the sectors trending above pre-pandemic levels.
Is the economy out of the woods now?
Not yet. The growth recovery is not very strong.
The next few quarters will see slower growth as the base effect wanes, economists said. Moreover, the key risk for the economy remains slowing global growth, which could curb exports and throttle private capex plans.
Global monetary policy tightening and still elevated input costs will weigh on the recovery as will the Indian central bank’s monetary tightening, the effects of which will start to kick in over the quarters ahead.
What does all this mean for monetary policy?
The April-June GDP growth print was lower than the Reserve Bank of India's forecast of 16.2 percent. What this means that is even if the RBI's forecasts for the subsequent three-quarters of this fiscal year are met, its full-year forecast of 7.2 percent could be missed by more than 20 basis points.
Ideally, this should mean a slowing of its monetary tightening. The RBI’s rate-setting panel has raised the policy repo rate by a total 140 basis points since early May as it seeks to curb red-hot inflation. However, while headline retail inflation has come off, it remains uncomfortably high above the tolerance ceiling of 6 percent.
Overall, the resilient growth backdrop means that the RBI would continue to tighten policy, albeit at a pace slower than before. Look forward to the possibility of 25 basis points rate hikes at the next couple of meetings instead of the 50-basis-points raises we have seen over the last two meetings.