A slowdown in India’s economy in the last quarter will increase calls for Prime Minister Narendra Modi to step up reforms but was less severe than feared, giving the Reserve Bank ammunition to resist government pressure to cut interest rates.
Gross domestic product expanded 5.3% in the July-September quarter from a year earlier, as a manufacturing slump took the bounce out of Asia’s third-largest economy. Growth in the previous quarter was at a 2-1/2 year high of 5.7%.
Thanks to growth in services and stronger-than-expected farming after a bad monsoon, the reading was higher than predicted by economists polled by Reuters, who on average forecast growth of 5.1%.
“Now the onus is on the government to boost growth by reviving the investment climate and get reforms moving,” said Shivom Chakrabarti, Senior Economist with HDFC bank. “That will have a more pronounced impact on growth in the next fiscal year.”
Worried by the growth performance, and encouraged by low oil prices and falling inflation, Finance Minister Arun Jaitley will reiterate his request that Reserve Bank of India (RBI) Governor Raghuram Rajan cut interest rates when the central bank holds it policy review on Dec 2, ministry officials have told Reuters.
Rajan can be expected to argue that with the slowdown not as severe as some forecast, inflation concerns carry more weight.
“If it was a very, very low number, there would have been pressure on the governor to act immediately. The better than expected overall GDP growth gives him that cushion” to wait, said Upasna Bhardwaj, Economist at ING Vysya Bank.
Economists polled by Reuters said a cut was unlikely, although markets have priced in a 25 basis point cut in the repo rate to 7.75%.
