RBI Lowers Q2 GDP Growth By 20 Basis Points To 6.8%

The Reserve Bank of India on Monday reduced its gross domestic product forecast for India by 20 basis points to 6.8% for the second quarter of fiscal 2024-25.

"Some high-frequency indicators have, however, shown a slackening of momentum in the second quarter of 2024–25, partly attributable to idiosyncratic factors like unusually heavy rains in August and September," the RBI said in its October bulletin's article, "State of the Economy." "Our economic activity index, based on a range of high frequency indicators, projects GDP growth at 6.8% in Q2:2024-25," the article noted.

This estimate is lower than the 7% projection provided by RBI Governor Shaktikanta Das during the October monetary policy meeting. At that meeting, Das also estimated GDP growth for the third and fourth quarters at 7.4% each.

"The global economy has remained resilient and is expected to maintain stable momentum over the rest of the year, amidst downside risks from intensifying geopolitical conflicts," the bulletin said, adding, "In spite of geopolitical tensions, India’s growth outlook is supported by robust domestic engines."

In parallel, there are other high-frequency indicators that show steady growth, the bulletin said.

Consumption spending is shaping up for a festival season revival, especially in small towns and lower-tier cities. Despite high prices tempering some of the enthusiasm, many buyers are prioritising discounts. Survey respondents are pointing to higher spending, driven by wardrobe updates, electronics, home décor, and jewellery purchases, the bulletin noted.

Although initial e-commerce sales have been underwhelming, retailers are expecting a late-season push. Consumer spending is expected to be about 25% higher than during Dussehra-Diwali last year. This is expected to be driven by offline retail, followed by the online channel, stated the bulletin.

The mass end has remained soft while premiumization is strong. With finance companies having expanded their reach, smaller towns and rural areas that are traditionally cash-dominated are seeing a rise in credit-driven consumption, particularly two-wheelers, electronics, and smart phones. Q-COMM shoppers are becoming increasingly discerning, price conscious, and channel agnostic. At top private banks, there is a hiring spree underway, which is a positive for consumption. There are also expectations of a surge in the hiring of gig workers for the festival season.

Recent data suggested that credit card transaction volumes have slowed as lenders are adopting caution in view of risks flagged in unsecured loans, according to the RBI. Incipient stress in the microfinance sector appears to have been driven by lenders’ drive to disburse loans rather than borrowers’ demand.

The self-regulatory organisation—Microfinance Institutions Network—points to guardrails to mitigate asset quality challenges such as capping a borrower’s loan repayment obligations at 50% of a household's income, limiting the number of microfinance lenders, and capping total indebtedness. Credit bureau data indicate that retail credit growth has moderated as lenders have tightened personal loan supply.

Looking ahead, private investment is showing some encouraging signs in terms of lead indicators, while consumption spending is shaping up for a festival season revival.

High-frequency food price data for October so far (up to 17th) show a moderation in the prices of cereals (mainly for rice) and pulses (except for gram dal), the bulletin stated. Edible oil prices continued to record a broad-based hardening after the import duty was hiked by 20 percentage points in September 2024. Among key vegetables, potato prices softened, while those of onions and tomatoes recorded a steep increase.