GDP growth slows to an almost two-year low in July–September

A shock drop in momentum: Annual GDP growth lost momentum in July–September—which corresponds to Q2 of fiscal year (FY) 2024—falling to 5.4% from 6.7% in April–June and marking the softest expansion since October–December 2022. The reading significantly undershot market expectations, likely leading our panelists to downgrade their forecasts for GDP growth in FY 2024, as well as raising pressure on the Reserve Bank of India (RBI) to kickstart its monetary policy easing cycle.

High interest rates hit domestic demand: The deceleration was driven by weakening growth in private consumption and fixed investment. On the domestic front, activity was likely stymied by past interest-rate hikes, high inflation, falling real wages and declining company profits. Household spending growth slowed to 6.0% in July–September compared to a 7.4% expansion in April–June. Moreover, fixed investment growth fell to 5.4% in July–September, marking the worst reading since January–March 2023 (April–June: +7.5% yoy). More positively, public consumption rebounded, growing 4.4% in July–September (April–June: -0.2% yoy). On the external front, the contribution of net trade to GDP growth rose to 1.5 percentage points from 0.7 percentage points in the prior quarter. Exports of goods and services growth softened to 2.8% in July–September (April–June: +8.7% yoy). That said, imports of goods and services deteriorated, contracting 2.9% in July–September (April–June: +4.4% yoy), the largest drop since October–December 2020.

Growth to rebound in October–December: Our panelists expect GDP growth to pick up in October–December, returning to around the 10-year pre-pandemic average of 6.9%. That said, the pace of expansion will remain lower than in recent quarters. Moreover, downside risks to the projection have grown in light of the July–September reading, which suggests that past rate hikes by the Central Bank are hurting domestic demand more than initially thought.

Panelist insight: EIU analysts commented: “Given the slower-than-expected growth in the first half of the ongoing fiscal year, we now forecast that real GDP growth will average 6.6% in 2024/25, rather than our previous expectation of 7%.” Nomura’s Aurodeep Nandi and Sonal Varma said: “The growth dip confirms our view that the economy is in the midst of a cyclical growth slowdown. Urban consumption is likely to remain weak, reflecting slow income growth, the RBI’s macroprudential tightening on unsecured, frothy credit and the absence of the pent-up demand boost.”

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