India’s Economy Grows Less Than Estimated Before RBI Rate Review

India’s economy grew less than estimated, adding pressure on central bank Governor Urjit Patel to lower interest rates at next week’s review.

Key Points

  • Gross domestic product rose 7.3 percent in July-September from a year earlier, the Statistics Ministry said in a statement on Wednesday
  • This is slower than the 7.5 percent median estimate in a Bloomberg survey of 34 economists, though faster than the previous quarter’s 7.1 percent pace
  • Gross value added, a key input of GDP that’s tracked by the central bank, rose 7.1 percent, slower than the survey’s 7.3 percent projection

Big Picture

Expansion will probably slow to 6.5 percent in October through December as Prime Minister Narendra Modi’s shock Nov. 8 decision to void high-value currency notes damps demand in the cash-based economy. The Reserve Bank of India is analyzing the impact of the decision and will list the implications at its Dec. 7 review, BloombergQuint reported on Monday, citing Patel. He will also have to contend with an expected increase in U.S. interest rates, which is sucking out money from emerging markets and increasing volatility.

Economist Takeaways

  • October-December "we will see the impact of demonetization and expect the economy to slow considerably -- maybe sub-5 percent rate of expansion," said Sujan Hajra, chief economist at Anand Rathi Securities Ltd. in Mumbai. However, the RBI will probably not lower borrowing costs on Dec. 7 because the government’s move to penalize tax evaders may boost revenues and fund a fiscal stimulus and the U.S. is expected to increase its interest rates, he said. "It’s all pretty fluid."
  • There’s no data available to gauge the impact of demonetization and it’s hard to say if the move will slow India’s informal economy, TCA Anant, the government’s chief statistician, told reporters in New Delhi on Wednesday.

The Details

  • Agriculture GVA grew 3.3 percent in July-September after a 2 percent increase the previous year; mining contracted 1.5 percent versus a 5 percent gain; manufacturing rose 7.1 percent versus 9.2 percent, and construction grew 3.5 percent versus 0.8 percent
  • Trade, hotel and similar services rose 7.1 percent versus 6.7 percent; financial services grew 8.2 percent versus 11.9 percent
  • The Reserve Bank of India, which doesn’t provide a GDP forecast, in October said it sees GVA rising 7.6 percent in the fiscal year through March, picking up to 7.9 percent the next year
  • Private consumption rose 7.6 percent; government spending surged 15.2 percent; fixed capital formation -- creation of productive assets such as factories -- fell 5.6 percent
  • Citing a weakening global growth outlook, the Patel-led monetary policy panel cut the benchmark repurchase rate to a five-year low of 6.25 percent in October
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