RBI likely to stay on rate hike path despite substantial GDP growth

One needn't cheer much from the encouraging GDP number which has been released by NSO last week as it may not deter RBI from increasing rates further. True, the GDP growth has surged to a four-quarter high of 13.5 per cent in Q1, but it is not going to stop RBI from its ongoing mission on increasing rates in its bid to tame inflation.

Real GDP at constant (2011-12) prices in Q1 is estimated to attain a level of Rs36.85 lakh crore from Rs32.46 lakh crore in the year-ago period, showing a growth of 13.5 per cent as compared to 20.1 per cent in Q1.

GDP growth will certainly moderate in Q2, as the base effect normalises, as underscored by the moderation in the core sector growth in July. Additionally, an uneven monsoon is likely to weigh upon agri GVA growth and rural demand. However, a robust demand for services, and some easing in the commodity price-inflicted pain for producers should support a YoY GDP growth of 6.5-7.0 per cent in the ongoing quarter, and 7.2 per cent for the year as a whole.

Icra foresees modest downside risks to the NSO's initial estimate of 12.7 per cent GVA growth in Q1, on account of potential downward revisions in the agricultural performance from the current level of 4.5 per cent. The GDP growth in Q1 was boosted by private final consumption expenditure and gross fixed capital formation, whereas government final consumption expenditure displayed an anaemic YoY growth of 1.3 per cent. The strong YoY growth partly also is led by favourable base effect, as Q1 growth was severely impacted by the Covid Delta wave. The GDP prints as a mixed bag, largely a story of service sector rebound which also was visible in the private consumption print in the expenditure side. However, manufacturing has remained a disappointing print, while utilities have remained resilient since the pandemic normalized.

The sharp uptick of around 26.7 per cent in nominal GDP essentially reflects the higher deflator. Going ahead, analysts see secular downturn in the growth print ahead, as the base effect fades and the economy also slows sequentially.

Emkay maintains growth may remain at seven per cent for the year, albeit with the downside risk. Going ahead, even as recovery in domestic economic activity is yet to be broad-based, global drags in the form of still-elevated prices, shrinking corporate profitability, demand-curbing monetary policies and diminishing global growth prospects weigh on growth outlook.

After already having increased key policy rates by 140 basis points in the current fiscal so far, analysts look for 25-60 bps more hikes in the repo rate by the end of the fiscal. After already having increased key policy rates by 140 bps in the current fiscal so far, analysts look for 25-60 bps more hikes in the repo rate during the remaining part of the current fiscal year.