Indian economic growth lacklustre, but high inflation makes rate cut unlikely
India’s gross domestic product (GDP) growth languished around its lowest in three years in the June quarter, offering no respite for Prime Minister Manmohan Singh as he struggles to escape a series of political scandals that have paralysed his economic agenda.
Weak demand in the West has hit exports, but the heaviest toll on the economy is from overspending and a lack of reforms at home - a point made by both the central bank and ratings agencies Fitch and Standard & Poor’s, who threaten to downgrade India’s sovereign ratings to junk.
The economy grew 5.5 per cent in the quarter, government data showed on Friday, just above the 5.3 per cent posted in the three-month period ending in March and slightly better than economists’ expectations in a Reuters poll.
Some investors have been optimistic a weak growth number would persuade the central bank to lower interest rates at its September 17 policy meeting, but the bank’s recent comments remain hawkish in the face of stubbornly high inflation.
“The RBI still maintains a hawkish bias and rate cuts are still seem some way off. Asian data momentum has not been great in Q3 so it is difficult to see a dramatic improvement in Q3,” said Jonathan Cavenagh, a currency strategist at Westpac, Singapore.
The absence of a stronger rebound in growth is further bad news for the government, which is embroiled in a row with the main opposition Bharatiya Janata Party (BJP) over sweetheart coal deals. The state auditor has questioned the deals, and the BJP has refused to allow parliament to function until Singh quits.
A raft of bills, including a number of important economic reforms, is now bogged down in the legislature. The furore has deepened the sense of dysfunction in Indian politics that has already stalled bold measures to cut government spending on costly fuel subsidies and help bring down high inflation. Poor monsoon rains have added to the economic gloom.
The manufacturing sector grew an annual 0.2 per cent during the quarter, the first of the 2012/13 fiscal year that runs to next March, while farm output rose 2.9 per cent.
For now, Finance Minister P. Chidambaram is focused on small-bore measures he hopes will put the economy on track, and his ministry is also contemplating possible budget cuts later in the year.
The Reserve Bank of India (RBI) meets on September 17 to review monetary policy and bond prices rallied earlier this week on expectations a low growth reading would pressure the bank to reduce interest rates, some of the highest among major economies.
But only last week the RBI said fighting inflation remained the cornerstone of its monetary policy, and said lower interest rates alone would not jumpstart the economy.
India’s benchmark 10-year bond yield rose 3 basis points to 8.23 per cent after the GDP data.