India's Economy Grows 5.4% in Q2, Falling Short of Estimates and Nearing Two-Year Low

India's economic growth is showing signs of slowing down, with the second fiscal quarter ending September recording an expansion of merely 5.4%. This figure falls significantly short of the 6.5% growth forecasted by economists and is close to a two-year low. It is a notable decline from the previous quarter's growth of 6.7% and marks the lowest reading since the last quarter of 2022. The slowdown is attributed to sluggish performance in the manufacturing and mining sectors, as reported by the country's statistics agency. The disappointing GDP reading has also impacted the yield on the country's 10-year sovereign bond, which swiftly dropped to 6.74% from around 6.8% following the announcement.

Impact on Future Interest Rates

The weaker-than-expected GDP growth may have implications for the country's interest rate trajectory. The Reserve Bank of India's (RBI) Monetary Policy Committee is set to convene from Dec. 6-8, and the disappointing economic performance could influence their decisions. Market observers were anticipating an eleventh consecutive pause by the RBI, with the current repo rate standing at 6.5%. The RBI had previously projected a GDP growth rate of 7.2% for the fiscal year ending in March 2025, indicating a more optimistic outlook.

2025 Growth Forecasts

Alicia Garcia Herrero, the chief Asia-Pacific economist at Natixis, shared her insights on India's economic trajectory, stating that while a slowdown is expected, a complete collapse is unlikely. She projected a growth rate of 6.4% for India in 2025. However, she also cautioned that the growth rate could dip as low as 6%, describing this scenario as "not a big problem, but it's not welcome." These forecasts underscore the uncertainty surrounding India's economic performance in the coming years.

Impact of Global Trade Shifts

The potential impact of President-elect Donald Trump's second presidency on India's economy was also discussed by Herrero. She suggested that India might not be significantly affected by the reshuffling of the value chain that China has been undergoing. Instead, she noted that India could serve as a production hub for China to manufacture products for domestic consumption, thereby potentially avoiding tariffs on exports to other countries.