India’s economic growth slowed more than expected in the third quarter, driven by weaker performance in manufacturing and consumption, likely increasing pressure on the central bank to consider interest rate cuts.
Gross Domestic Product (GDP) grew by 5.4% in the July-September period year-on-year, marking the slowest growth in seven quarters and falling short of the 6.5% forecast in a Reuters poll. The previous quarter had seen a 6.7% growth.
Meanwhile, the Gross Value Added (GVA), a more stable measure of economic activity, grew by 5.6%, easing from a 6.8% increase in the previous quarter.
Manufacturing growth dropped sharply to 2.2% from 7% in the previous quarter. The mining sector also contributed to the slowdown, with the economy experiencing a bump in its post-pandemic recovery.
The slowdown is also being fueled by inflation, which is running at about 6%, reducing demand for goods, including soaps, shampoos, and cars, especially in urban areas. Private consumption rose by 6.0% from a year earlier, down from 7.4% in the previous quarter.
Despite the slowdown, government spending rose by 4.4% year-on-year in the third quarter, up from a contraction of 0.2% in the previous quarter. Agricultural output, supported by a good monsoon, performed better, rising by 3.5% compared to 2% in the previous quarter.
Corporate earnings also indicated a slowdown, with over 50% of the 44 firms in the Nifty 50 index either missing analysts’ estimates or reporting results in line with expectations. Companies such as Maruti Suzuki, Nestle India, and Hindustan Unilever reported sluggish urban consumption in the September quarter.
Additionally, inflation-adjusted wage growth for listed Indian firms has remained below 2% for all three quarters of 2024, well below the 10-year average of 4.4%, according to Citi data. As a result, India experienced record foreign outflows of nearly $12 billion from its equity markets in October.
The GDP data has led to a decrease in bond yields and overnight index swap rates, signaling a higher likelihood of an interest rate cut by the Reserve Bank of India (RBI). Some economists have suggested that the RBI may even consider a rate cut in December, while others expect a cut in February.
India’s finance and trade ministers have called for lower interest rates to boost investment and capacity-building in industries. However, Nageswaran refrained from commenting directly on the RBI’s next steps, stating that the central bank is aware of the data and knows how to act.
The RBI’s Monetary Policy Committee (MPC) left the benchmark repo rate unchanged at 6.50% in October due to persistent inflation but adopted a “neutral” stance. The RBI will announce its next policy decision on December 6.
In addition to economic concerns, India’s foreign exchange reserves also dropped for an eighth consecutive week.
As of November 22, the reserves stood at a five-month low of $656.58 billion, data from the Reserve Bank of India (RBI) showed on Friday. The reserves fell by $1.3 billion during the reporting week and have dropped by $47 billion cumulatively over the last seven weeks.
