GDP growth back on track, Inflation in line with RBI projection

By Gaurav Kulshreshtha | 06 MARCH 2018

After hitting a low of 5.7% in 1Q of 2017-18 due to the demonetization and GST implementation related disruptions, the 3Q real GDP growth rebounded to 7.2% as per data released by ministry of statistics and programme implementation. This was in line with Citi economist’s expectation of 7.1% for the given period.

The pace of surge of reported investment growth to 13% YoY from 8.9%YoY last quarter was quite a positive surprise, despite the general anticipation of acceleration basis high frequency indicators (CV Sales, credit growth, railways freight traffic etc.) and a favorable low base.

The recovery in 3Q real GDP also assumes significance given that it is despite the net exports acting as a drag, subtracting 140bps of growth versus a positive contribution of 20bps in 2Q.

Growth Rates of GDP
Constant prices (2011-12) Current prices
Annual 2017-18 (Second advance) 6.6 9.8
1Q 2017-18 (April-June) 5.7 9.2
2Q 2017-18 (July-Sep) 6.5 10
3Q 2017-18 (Oct-Dec) 7.2 11.9

(Source: CSO press release)

In an earlier data release, January CPI inflation had eased slightly to 5.1% from 5.2% in December. This was in line with RBIs projection of CPI @ 5.1% in Jan-March quarter. The modest fiscal slippage announced during the Budget, uncertainty over MSP hike and headline CPI inflation above 5% had kept central bank on a cautious tone in February policy.

Citi economist believe that given the easing of crude oil prices along with RBI’s express guidance to carefully nurture the nascent recovery, it would be unlikely for RBI to embark on any pre-emptive rate hike cycle. They believe that RBI will stay on an extended pause for most part of 2018 assuming that the MSP (Minimum Support Price) hikes are relatively non disruptive. They also believe that the broad uptrend in yields is unlikely to reverse in the near term. Hence Investors may continue to avoid any fresh long duration exposure and remain diversified in their fixed income portfolios.

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