India's Economy Slows More Than Expected, Potentially Clearing Path for Rate Cuts -- Update

By Kimberley Kao and Fabiana Negrin Ochoa

India's economy slowed much more sharply than expected in the most recent quarter, undershooting the central bank's expectations and potentially backing the case for an interest-rate cut next week.

The world's fifth-largest economy grew 5.4% from a year earlier in the July-September quarter, provisional figures issued by the Ministry of Statistics and Program Implementation showed Friday. That was the slowest pace of growth since the fourth quarter of 2022.

The print was both lower than the previous quarter's 6.7% expansion, and well below the median estimate for 6.4% growth compiled in a Wall Street Journal poll of economists. It also missed the growth projected by the Reserve Bank of India in November.

Economists had largely expected the data to show that the economy had lost some speed in the latest quarter, mainly due to soft manufacturing and investment activity, and weak urban consumption.

Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, thinks the GDP headline will be a shock to central bank policymakers. In a commentary, he attributed the big miss in large part to statistical discrepancies, though the real economy softened too. But there was at least an encouraging sign in agricultural sector growth, which hit a five-quarter higher to signal improving prospects for rural demand, the economist said.

"All told, our below-consensus GDP growth forecasts of 6.5% and 5.8% for this year and next, respectively, look well positioned," Chanco said, as does Pantheon's call for the RBI to start its easing cycle next month.

India's central bank is one of the few in the region that has yet to start loosening monetary policy settings. Many other have already embarked on rate cuts, but easing momentum has stalled somewhat as monetary policies diverge due to domestic factors, heightened uncertainty and market volatility.

The RBI announces its rate decision on Friday, Dec. 6, which comes against the backdrop of a recent rise in the country's inflation. This has had many economists predicting a hold, particularly as the central bank's governor, Shaktikanta Das, has mentioned the need to ensure inflation remains sustainably on target before making any moves.

Those in the hold camp include research firm Capital Economics, which continues to think that the RBI will not be comfortable cutting rates yet, despite the sharply slower GDP print.

Looking ahead, Capital Economics expects growth in the regional economic powerhouse to remain subdued in the coming quarters, as household consumption and investment growth moderate in an environment of still-high interest rates.

"But the economy is not going to crater," economists Shilan Shah and Harry Chambers said in a commentary. Timely data such as purchasing managers index surveys remain consistent with healthy growth in the next quarter and they expect India's expanded public infrastructure drive to continue supporting activity.

The cooler pace of expansion is unlikely to significantly alter views on the long-term trajectory for the South Asian economy, which remains one of the fastest-growing in the region.

Moody's Analytics economists in a note said they expect growth to pick up in the December quarter as momentum builds in manufacturing and agriculture.

That would be key to delivering a better growth print for the final quarter of the fiscal year.

Friday's data showed that manufacturing activity stumbled in the July-September period from the preceding quarter, with growth slowing to 2.2% from 7.0%. Construction sector momentum also slowed, while the mining & quarrying sector tipped into contraction.

Agriculture was a brighter spot, expanding more rapidly in the July-September quarter.

Private consumption meanwhile slid to 6.0% from 7.4%, but government spending pulled out of negative territory to grow 4.4% during the quarter.

The central bank had previously projected real gross domestic product growth of 7.2% for the fiscal year ending March 2025. That would compare with 8.2% in the prior year.

The disappointing figures raise the stakes for the RBI's meeting next week.

Analysts are divided on whether there is room for a rate cut at next week's but what seems certain is that after such a surprising slowdown in growth, what the central bank says about its outlook for the economy and rates will be keenly watched.

Write to Kimberley Kao at [e-mail] and Fabiana Negrin Ochoa at [e-mail]

(END) Dow Jones Newswires

11-29-24 0735ET