India's GDP growth revives in October-December, but is it enough?

India experienced a notable improvement in economic growth momentum during the October-December quarter of the current financial year FY25, as reported by HSBC Research. This analysis suggests that the country's GDP growth, which had been disappointing at 5.4% in the previous quarter ending September, shows signs of recovery. The report drew from an assessment of 100 activity indicators, 65% of which indicated positive growth in December, up from 55% the prior quarter, with agriculture, exports, and construction showing remarkable progress. Urban consumption has also witnessed a recovery. Despite the encouraging growth signals, the report brings attention to ongoing restrictions within the economy. Indicators related to utilities and private investment remain subdued, indicating that challenges persist. The overall activity levels are still lagging behind the impressive highs recorded in June, when approximately 75% of the metrics indicated positive progress. As a result, the Gross Value Added (GVA) growth is trending at about 6.5% for this period. Inflation rates have been a significant concern, but the report notes a decrease in food inflation, suggesting that the overall inflation rate is projected to fall below 5% in January. Food prices, which saw a rise in the previous months, started declining in December, particularly for vegetables such as onions, tomatoes, and carrots, alongside certain pulses. As a result, HSBC forecasts a reduction in inflation from 5.5% in November to an anticipated 5.3% in December, with predictions indicating it will drop further to below 5% in January. This decline in inflation is critical as it may influence the monetary policy landscape in India. HSBC Research expressed expectations for the Reserve Bank of India to initiate two rate cuts of 25 basis points each in February and April, reducing the repo rate to 6.00%. The tightening domestic liquidity conditions observed over the last quarter may necessitate measures aimed at easing access to capital as the year progresses. Potential approaches may include introducing more Variable Rate Reverse repos (VRRs), foreign exchange swaps, and Open Market Operations (OMO) purchases. Notably, the research cautions that the upcoming rate-cutting cycle is likely to be limited due to anticipated constraints from a smaller balance of payment surplus amid increasing volatility in global foreign exchange markets.