India’s economy grew 7.7 per cent in the three months through June, its weakest in six quarters, with further sluggishness looming as a spate of interest rate increases, high inflation and weak global conditions take a toll.
While gross domestic product in Asia’s third-largest economy fell below 8 per cent for the second straight quarter, the Reserve Bank of India is expected to continue with its monetary tightening to fight inflation that remains above 9 per cent.
The growth figure slightly exceeded the median forecast in a Reuters poll for an annual rise of 7.6 per cent, and compares with 7.8 per cent growth in the previous quarter.
“The latest growth number reinforces the view that although growth is slowing down, it is not collapsing as feared by some,” said Ashutosh Datar, economist at IIFL in Mumbai, who said another 25 basis point increase at the central bank’s next policy review on Sept. 16 was likely.
India’s benchmark 10-year federal bond yield rose 2 basis points to 8.35 per cent after the data release while stocks pared earlier gains.
The 1-year overnight indexed swap (OIS) rate rose 5 basis points to 7.85 per cent while the 5-year rate rose 3 basis points to 7.03 per cent, flattening the curve as the case for a rate increase on Sept. 16 strengthened.
India’s growth slowed for the fifth consecutive quarter in the latest sign of cooling in the big emerging BRIC economies. Brazil’s economic activity fell in June from a month earlier, the first such drop since late 2008, while China posted slower growth in its June quarter.
India’s manufacturing sector grew 7.2 per cent in April-June from a year earlier, data released on Tuesday showed, an improvement from the previous quarter but below the 10.6 per cent growth clocked a year earlier.
Farm output rose an annual 3.9 per cent for the same period, down from its previous quarter growth but above 2.4 per cent expansion a year earlier.
Construction was a dark spot, rising by just 1.2 per cent annually, down from 8.2 per cent in the previous quarter, as high interest rates curbed building activity and infrastructure projects were held up by delays in approvals.
A steady rise in interest rates combined with stubbornly high inflation are eating into demand in India and squeezing credit-sensitive industries, prompting many economists to lower their growth forecasts to below 8 percent for the fiscal year that ends in March.
India grew at 8.5 per cent in the previous fiscal year.
With the government preoccupied by corruption scandals that have stalled approval of legislation and projects that could help ease bottlenecks in the economy, the Reserve Bank of India has struggled in its battle with inflation.
The RBI has raised rates 11 times since March 2010, including a sharper-than-expected 50 basis point increase last month, but headline inflation for July still came in at 9.22 per cent, well above the central bank’s 4 to 4.5 per cent comfort zone.
The RBI has made clear that containing prices is its priority, even as debt woes in the United States and Europe darken the global outlook.