gdp growth plummets raising concerns over economic outlook and rate cuts

The recent announcement of India's Q2 GDP growth at a mere 5.4 percent has raised concerns about the government's full-year growth estimates of 6.5-7 percent. This unexpected downturn has intensified discussions around the need for a potential rate cut by the Reserve Bank of India (RBI) in its upcoming Monetary Policy Committee (MPC) meeting.

Growth Forecasts and Demand Deficits

The RBI's own State of the Economy report had previously estimated Q2 growth at a more optimistic 6.7 percent, while the MPC had forecasted it even higher at 7 percent. The consensus among economists was that growth would slow but remain around 6.5 percent. The persistent demand deficits in both domestic and external markets have been identified as a significant factor contributing to the lackluster growth. The implications of this demand shortfall are profound, as it not only affects current economic performance but also raises concerns about future growth prospects.

Slowdown in Bank Credit Growth

The latest data indicates a slowdown in non-food bank credit growth, which has dropped to 11.15 percent year-on-year in mid-November, down from 13.6 percent in mid-August. Compounding the challenges posed by slowing growth is the issue of rising inflation. The RBI's inflation target has been breached, with retail inflation for October recorded at 6.2 percent, significantly above the upper limit of the target range. The Flash Purchasing Managers' Index (PMI) for November further corroborates these concerns, indicating an upward movement in core inflation.

Challenges for Economic Recovery

As inflation continues to bite into consumer spending power, the potential for a sustained economic recovery appears increasingly tenuous. The stark contrast between the actual GDP growth and the optimistic forecasts has led to calls for a reassessment of monetary policy. The RBI's recent actions to curb unsecured credit have already shown signs of slowing down bank lending, which could further exacerbate the economic slowdown if not addressed. Policymakers face a delicate balancing act: they must navigate the complexities of rising inflation while also fostering an environment conducive to growth.

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