India’s growth shocker puts pressure on RBI to cut rates

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India’s economy grew at its slowest pace in almost two years, dampening the outlook for the full year and testing Prime Minister Narendra Modi’s ambitious growth plans.

Gross domestic product grew 5.4% in the three months to September from a year earlier, the Statistics Ministry said in a statement on Friday. That’s the worst reading since the fourth quarter of 2022 and much lower than the central bank’s projection of 7% for the period. None of the 44 economists surveyed by Bloomberg had predicted such a slow pace of expansion.

Bonds rallied as traders now expect the central bank to start loosening monetary policy. The yield on the 10-year benchmark bond fell 6 basis points to 6.74%.

The data is likely to prompt economists to further downgrade their GDP growth forecasts for the year through March 2025. Investment banks like Goldman Sachs Group Inc. are already predicting growth as low as 6.4%.

The figures will also put pressure on the Reserve Bank of India, which has been predicting growth of 7.2% for the full year, to cut interest rates. The next monetary policy decision is scheduled for Dec. 6.

A greater-than-anticipated slowdown may “entirely shift the narrative for monetary policy,” said Teresa John, an economist at Nirmal Bang Institutional Equities. “A rate cut in December seems highly likely.” Several economists, however, expect easing to begin early next year.

The latest data confirms concerns that India’s world-beating growth is slowing, with falling wages, slumping company profits and high inflation hurting economic activity. The central bank has kept rates unchanged for almost two years now, with Governor Shaktikanta Das recently reiterating that a rate cut at this stage would be “very risky” given inflation risks.

The slump in second quarter’s growth was largely due to weaker manufacturing, mining and electricity and gas production. Agriculture sector showed improvement due to above-average rainfall, boosting farm incomes.

Despite the shocking slowdown, economists expect a pick-up in growth in the second half of the financial year. Aditi Nayar of ICRA Ltd. said that while the outlook for the next few months is “decidedly mixed,” government spending and revival in rural consumption will lift sentiment, “resulting in a full-year expansion of 6.5%-6.7%.”

Prominent ministers in Modi’s government, including the finance minister, have recently stated that high borrowing costs are hurting the economy.

Weak growth will make it difficult for India to cash in on its demographic dividend. Joblessness, especially among young people, emerged as a key concern for voters in India’s election this year, contributing to Modi’s worse-than-expected showing at the polls.