Post GDP Numbers RBI May Have To Rethink Aggressive Monetary Stance

Softer than anticipated GDP numbers may see some caution in the RBI from a more aggressive stance in monetary tightening.

"Overall, it confirms that growth recovery is not so strong in India. It ideally implies that monetary tightening should be not very aggressive. However, it appears that the terminal repo rate will be 5.75-6% in this cycle with 1-2 more rate hikes, ending the cycle in Dec'22," Nikhil Gupta, Chief Economist, MOFSL group said in a note.

According to Raghvendra Nath, Managing Director - Ladderup Wealth Management Private Limited, one can expect another rate hike of 25 to 50 basis points in the coming months.

"Thus, despite India remaining the world's fastest growing economy, all eyes are place on global recession fears and rising borrowing costs, " he says.

"The Q1 GDP data at 13.5%, a double-digit growth may optically look high. But it is lower than most estimates. This quarter was not affected at all by the pandemic. The lower than expected data is despite the private consumption," says Nish Bhatt, Founder & CEO, Millwood Kane International - an Investment consulting firm on Q1FY23 GDP data.
According to him, the contact-oriented services, hotel, and trade provided a boost to the overall data. "While it is encouraging to see growth in the agriculture output, the manufacturing segment was a big drag. The growth in the construction segment indicates higher demand for cement, steel, and other allied segments. A good monsoon year may provide a boost to Q2 growth. Going forward - oil prices, geopolitical tensions between Russia-Ukraine, and a slowdown in the West will guide global growth," Bhatt adds.

Following the data today, the RBI may also lower its own GDP forecasts. "Notably, RBI expected 16% growth in 1Q, with 6.2/4.1/4% growth in the subsequent quarters. Assuming no change in 2Q-4Q projections, today's 1Q data suggests that RBI's FY23 growth forecast will be revised down to 6.7% from 7.2% earlier. We, on the other hand, have revised our forecast to 6.5%, up from 6.3% earlier," Gupta adds.