India’s GDP Growth Slows to 5.4% in Q2 FY25, Raising Chances of RBI Rate Cuts

Highlights

• India’s GDP growth slowed to 5.4% in the July-September quarter of FY25.
• Key sectors saw mixed performance with manufacturing growing modestly.
• Agricultural sector growth rose to a five-quarter high.
• The weaker-than-expected growth has increased the likelihood of a policy rate cut by RBI.

India’s economic growth slowed significantly in the July-September quarter of FY25 while recording a seven-quarter low of 5.4%, well below analysts’ projections of around 6.5%.

The slowdown driven by weaker industrial performance and reduced investment demand has raised concerns about the overall economic trajectory.

Analysts suggest the current forecast of 7% growth for FY25 might need a revision if this trend continues.

This weaker-than-expected performance has also increased the likelihood of a policy rate cut by the Reserve Bank of India during its February Monetary Policy Committee meeting.

Key Highlights from the Report

• Gross Value Added (GVA) grew at 5.6%, while net taxes on GDP growth fell to a seven-quarter low of 2.7%, according to data from the National Statistical Office (NSO).
• Nominal GDP growth for the quarter was 8%, significantly lower than the previous year, raising concerns about its impact on the government’s tax revenues.
• Manufacturing grew by a modest 2.2%, while the electricity sector expanded by 3.3%.
• The labour-intensive construction sector slowed to 7.7%, down from 10.5% in the previous quarter.
• Overall services growth eased slightly to 7.1% from 7.2% in the June quarter.
• Trade, hotels, and transport services saw 6% growth, while financial and professional services slowed to 6.7%.
• Public administration and defence recorded 9.2% growth, a dip from the previous quarter.
• Agricultural growth stood out, rising to a five-quarter high of 3.5%, supported by robust kharif sowing.
• Mining and quarrying contracted by – 0.1% due to unseasonal rains.
• Private consumption growth slowed to 6%, despite a favourable base.
• Government spending increased by 4.4%, recovering from a pre-election slump.
• Investment demand growth, reflected in gross fixed capital formation (GFCF), fell to 5.4%, down from 7.5% in the June quarter.
• Exports growth slowed to 2.8%, down from 8.7% in the June quarter.
• Despite weaker exports, net exports supported GDP growth, as they were 40.5% lower than the same period last year

What Industry Expects Have To Say?

Experts suggest that elevated interest rates and fiscal consolidation could impact GDP growth this year, though rural demand may drive consumption in the coming months.

Chief Economist at CRISIL Dharmakirti Joshi said, “Rural demand is expected to drive improvement in consumption. The impact of healthy kharif production, coupled with gains from the festival season, is expected to increase demand in the second half. However, slowing credit growth is expected to weigh, particularly on urban demand.”

Similarly, Chief Economist at Bank of Baroda Madan Sabnavis noted, “Consumption is already recovering with festival rural spending and wedding season. The government will expedite budget spending and hence will be picking up. Investment shows positive signs as intentions higher than last year post July. We expect growth for the year to average 6.6-6.8 per cent in FY25.”

However, Chief Economist at India Ratings & Research Devendra Kumar Pant cautioned, “Both consumption and investment demand is still dependent on the government, with the government’s focus on fiscal consolidation, the growth outlook doesn’t appear to be very good.”

Here are some more opinions as shared in a recent ToI report.

Upasna Bhardwaj, Kotak Mahindra Bank – “The sharply lower-than-expected GDP figures reflect the highly disappointing corporate earnings data. The manufacturing sector appears to have taken the maximum beating.”

Harry Chambers, Capital Economics – “We expect growth to remain subdued over the next few quarters as household consumption moderates and investment growth eases in an environment of still-high interest rates.”

Aditi Nayar, ICRA – “In light of the recent spike in CPI inflation, we anticipate a status quo from the RBI’s monetary policy meeting next week. However, a February 2025 rate cut may be on the table if the next two inflation prints recede.”

Sakshi Gupta, HDFC Bank – “The softer economic growth stemmed from lower manufacturing, electricity and mining growth in the second quarter. On the demand side, consumption growth slowed probably due to a moderation in urban demand.”

Garima Kapoor, Elara Securities – “Amid sluggish consumption growth owing to moderating real income growth and the effect of concentrated and heavy rains, demand drivers remained weak in Q2 FY25.”

Radhika Rao, DBS Bank – “The outcome reflects a miss in domestic-oriented as well as external-driven segments. This quarter likely marks the bottom of the cycle and we count on a modest recovery in the second half as few of these constraints are expected to even out.”

FAQs

Q1. What was India’s GDP growth rate in the July-September quarter of FY25?

Answer. India’s GDP growth slowed significantly in the July-September quarter of FY25, recording a seven-quarter low of 5.4%, well below analysts’ projections of around 6.5%.

Q2. What are the key highlights from the report on India’s economic growth?

Answer. Key highlights include Gross Value Added (GVA) growth at 5.6%, nominal GDP growth at 8%, and mixed performance across various sectors such as manufacturing, construction and agriculture.

Q3. What is the likelihood of a policy rate cut by the Reserve Bank of India?

Answer. The weaker-than-expected performance has increased the likelihood of a policy rate cut by the Reserve Bank of India during its February Monetary Policy Committee meeting.

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