The economy's growth in Q2 (July-September) slowed to 5.4%, much lower than the expected 6.5% or 7% by the RBI and economists.
This 5.4% growth is the weakest since Q3 of 2022-23, down from a strong 8.2% last year.
The first half of 2024-25 has grown by only 6%, making the 7%-plus growth forecast for the full year seem overly optimistic.
While GDP growth was 5.4%, Gross Value-Added (GVA), which excludes indirect taxes and subsidies, was slightly better at 5.6%.
The RBI’s Monetary Policy Committee (MPC) may need to lower its 7.2% GDP growth forecast.
At the same time, it faces pressure to lower interest rates to support growth but is cautious because inflation remains high at 6.2% in October.
The RBI is likely to focus on managing inflation first and may not cut rates until inflation shows a clear and sustained decline.
It may ease liquidity (money supply) issues but not drastically change rates.
Government officials are downplaying the slowdown, attributing it to temporary weak urban demand, and expect rural demand and public spending to drive growth in the second half
Urban consumption is struggling due to poor wage growth and rising prices.
Simply relying on interest rates to fix this issue might be too simplistic.
To revive demand, the government may need to take fiscal measures like cutting fuel taxes and reducing high GST rates on certain items to ease living costs and stimulate consumption
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