India’s Q1 GDP growth exceeds expectations; economy likely to expand above 7 pct this fiscal

In the first quarter of 2016, the Indian economic growth accelerated at a faster than expected pace of 7.9% y/y. Consensus expectation was for a growth of 7.5%. In the last quarter of 2015, the Indian economy grew 7.2% y/y. The economic growth was mainly driven by domestic sector, led by private consumption that grew over 8% y/y for the second straight quarter. However, the robust GDP figure hides the persistent weakness in exports and private investments.

Nevertheless, domestic demand is likely to be helped by the projections of a good monsoon in 2016. For the fiscal year 2015-2016, the Indian economy expanded 7.6% and is expected to grow over 7% in the fiscal year 2016-2017, said Commerzbank in a research report. The Reserve Bank of India might be leaning towards saving its firepower and keeping rates on hold at 6.5% next week, especially with the forthcoming global risks events. With the 7.9% y/y growth in the first quarter, India is put under as the most rapidly growing economy in Asia.

Private consumption, which accounts for 63% of the GDP, was the main growth driver. It expanded more than 8% for second straight quarter. It grew 8.3% y/y, as compared with 8.2% growth recorded in Q4 2015. Private consumption is likely to remain properly supported in the coming year. This is because of projections of better monsoon that will underpin rural income and consumption, and due to increased pay for civil servants that will commence in July, according to Commerzbank.

Looking at the four important industry groups, services growth continued to be strong at 8.7% y/y, as compared with an average of 9% for the last two quarters. This is in line with solid figures of private consumption. Meanwhile, manufacturing grew 9.3% y/y as compared with the earlier growth of 11.5%. Construction remained stable at 4.5% y/y from the earlier quarter’s growth of 4.6%, whereas growth in agriculture recovered to 2.3% y/y from Q4 2015’s -1%.

For the current fiscal year, the Indian economy is expected to expand over 7%, especially if a better monsoon gives additional support to the agricultural sector and domestic demand.  Meanwhile, if inflation continues to remain stable around the central bank’s target rate of 5% for the remainder of 2016, the RBI might be tempted to give additional stimulus by further lowering rate by 25-75bp. That is if the USD/INR pair is stable, added Commerzbank.