India's GDP growth exceeded expectations in the second quarter, reaching 8% for the first half amid near-zero inflation. Despite the rupee weakening beyond 90 to the dollar, economic indicators suggest resilience. Experts question the justification for interest rate cuts at this juncture.
Recent economic data highlights the robustness of India's economy. The second quarter GDP growth came in much higher than anticipated, contributing to an 8% real GDP expansion in the first half of the fiscal year. Projections for the full year stand at approximately 7.6% or higher, bolstered by structural reforms that have enhanced formalization and ease of doing business through a digital-first approach.
Rural demand remains steady, while urban consumption is recovering, supported by stabilizing inflation and job creation in the formal sector. The GST rate rationalization has revived business confidence, with manufacturing capacity utilization at around 80%. The services sector led growth, particularly in financial, real estate, and professional services, while manufacturing and construction boosted industrial activity.
Liquidity conditions are optimal and growth-supportive, with a healthy pickup in credit offtake. Credit expansion is robust across the ecosystem, including non-banking financial companies (NBFCs) and private credit. Deal volumes indicate a surge in mergers and acquisitions (M&A) among India Inc., signaling renewed interest in market capture and consumer engagement.
On the external front, no major concerns emerge despite slower capital flows. Foreign direct investment (FDI) continues as the primary inflow, while slowdowns in portfolio investments, non-resident Indian (NRI) deposits, and short-term credit are viewed as cyclical. Export diversification efforts, backed by policy measures, are fortifying the economy.
The rupee's breach of the 90-per-dollar mark stems from higher US tariffs on India compared to peers like China and Vietnam, activity in the offshore non-deliverable forward (NDF) market, and a marginally wider trade deficit. However, historical patterns suggest potential appreciation following depreciation.
In this context, calls for rate cuts appear premature. A cut could disrupt the growth-inflation balance targeted by the Monetary Policy Committee (MPC). Household savings allocation to bank deposits at 34% warrants rewarding depositors, especially with strong credit demand in MSMEs—five-and-a-half times the 16-year average—and across term and working capital loans. Asset prices show buoyancy, advising caution against easing now.
Soumya Kanti Ghosh, member of the 16th Finance Commission and group chief economic advisor at State Bank of India, argues that current policy rates suffice for sustained growth.