India's July-September GDP not a game-changer for today’s RBI review

India's growth maintained its spot as amongst the fastest in the region. Real GDP growth rose to 7.4% YoY in 3Q 2015 (second quarter FY15/16) in line with expectations and higher than 7% the quarter before. The underlying growth trend firmed up with the smoothened quarter-on-quarter pace inching up from 2Q. On Gross value added (GVA) basis, growth also rose to 7.4% YoY in 3Q from 2Q's 7.1%. Meanwhile the divergence in inflation indices in 2Q evened out. Mirroring the sharp decline in WPI inflation, GDP deflator also turned negative in 3Q. 

On the demand end, private consumption slowed to 6.8% YoY in 3Q 2015 from 7.4% in 2Q on slower rural spending, while urban demand held up. Rural demand was subdued on the back of weak wage growth, successive weak monsoons and lower fiscal support. This outweighed a pickup in urban consumption, which is expected to get a further boost from the upcoming public-sector wage adjustments. 

Government consumption jumped 5.2% from 2Q's 1.2%. Fixed asset investment also recovered to 6.8% from sub-5% quarter before, lifted by higher publicsector led capex spending, while stocks were drawn down modestly. The sharp contraction in exports and imports eased, but remained a drag with -4.7% YoY in exports and -2.8% in imports. 

The sectoral breakdown saw agriculture hold its stead at 2.2% YoY in Q3 2015 vs 2Q's 1.9% despite below-average rains. Industrial activity also improved to 6.8% from 6.5% in 2Q, on the back of firm manufacturing output (9.3% from 2Q's 7.2%) and utilities. Service sector performance moderated slightly as the trade and transport sector slowed to a still respectable 10.6% YoY from 2Q's 12.8%, while financial services and public/ administration services fared better. 

Overall, underlying trends appear to confirm that a cyclical recovery is underway and the business cycle is off its trough. FY15/16 growth is expected to average 7.4% from 7.3% year before. Pickup in discretionary spending, easing inflation, continued project clearances and strong public sector participation will be crucial elements in the recovery phase. Public-sector led investments took the lead in reviving the capex cycle this year, but this room will narrow next year as fiscal spending commitments rise amid pressure to meet fiscal targets. This will require private sector activity to pick momentum as demand returns to the table. 

Yesterday's GDP report is not a game-changer for the central bank's policy meeting today. A gradual recovery in growth is underway alongside an uptick in Oct CPI inflation and resilient inflationary expectations. On the external end, concern over any adverse reaction to the US Fed's widely-anticipated rate cut this month will see policymakers err on the side of caution. These factors along with the need to ascertain the government's fiscal position following the pay commission's recommendations will see the RBI on hold today and maintain a prolonged pause for this fiscal year.