India’s GDP (gross domestic product) expanded at a faster-than-expected 7.9 per cent in the March quarter, surprising economists. For FY16, India grew at 7.6 per cent, making it the fastest economic growth in five years.
The acceleration in economic growth coincides with Narendra Modi government completing two years in office and shows that its focus on infrastructure spending is yielding results.
The lift-off in GDP growth has been on account of rising consumer spending, which has been fuelled by a string of rate cuts by the Reserve Bank of India. Governor Raghuram Rajan has cut the repo rate by 150 basis points since January 2015, reducing it to 6.50 per cent – the lowest level in more than five years.
Lower interest rates have helped passenger cars and two-wheelers sales notch double-digit growth, while personal loans and credit card loans are growing at around 20 per cent, fuelling economic growth.
Stronger consumer spending has helped compensate for private capital investment, which remains sluggish because of over-capacity in the economy. It is for this reason that investors want rate cuts to continue.
But Tuesday’s GDP data and the rising inflationary trend have dampened chances of an interest rate cut next week when the RBI meets to finalize its monetary policy, economists say.
Wholesale price inflation turned positive after 17 months in April, while consumer prices – which the RBI tracks to set interest rates – rose for the first time since January last month.
The impending Pay Commission hike for central government employees and pensioners will further fuel consumer spending, adding to concerns about inflation.
“Given that the RBI faces a tough challenge in meeting its inflation target … we think that it will keep the repo rate on hold,” said Shilan Shah, an economist with Capital Economics.
Earlier this month, Dr Rajan said that core inflation is higher than desired, in an indication that the RBI may hold rates next week.
“Broadly, core inflation has been fairly sticky, a bit higher than we would want. It hasn’t moved up and down. We will continue on the task of anchoring expectations,” Dr Rajan said at an event at the Chicago Booth business school in London.
But given Dr Rajan’s track record, a surprise rate cut cannot be completely ruled out on June 7.