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BENGALURU -India's economy grew 13.5% year-on-year in the April-June quarter, the fastest pace in a year, official data on Wednesday showed amid fears of growth sharply slowing this quarter and the next two as higher interest rates hit activity.

Economists in a Reuters poll had forecast gross domestic product in Asia's third-largest economy would grow 15.2% year-on-year in the April-June quarter, compared with 4.1% in the previous quarter.

COMMENTARY

KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU

"The strong June-quarter real GDP growth print of 13.5% (albeit slightly lower than our expectation of 15.0%) is essentially a reflection of a rather low statistical base effect and also a reflection of pent-up demand following the exit from the Omicron wave during the March quarter."

"What is also clear is a distinctive shift in demand toward services, particularly for contact intensive services. However, we are seeing signs of waning of the intensity of tailwind generated by economic reopening."

"India's economic recovery process will likely continue to be weighed-in by rather weak labour market recovery and quite benign wage outlook hinting at weak domestic consumption outlook."

"This would mean that while we are convinced pace of easing of inflation would be slow, RBI is not far away from the end of its current rate hike cycle. Rather than staying on course until inflation comes down to the median target of 4.0%, RBI would stop hikes by end of 2022 even if the real policy rate remains negative once they are convinced of decelerating price pressure."

"For FY23, we expect the real GDP to grow by 7.1% y/y, though a lower print would not surprise us."

GARIMA KAPOOR, ECONOMIST, INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI

"Q1FY23 GDP growth came below our expectation despite full resumption of services sector post omicron wave, as both manufacturing and services GVA came below expectations. After today's numbers, we see downside of about 30-40 bps to our full-year GDP growth projection of 7.5% amid expected sluggishness in rural demand and weak outlook for external demand conditions."

"On the positive side, in the near term at least, the robust urban demand will help to moderate the impact of weakness in rural demand and encouraging signs of uptick in private capex front with government front loading spending and nascent signs of private capex being visible led by higher capacity utilisation (to 11-quarter high of 75.3%) and healthy credit demand (noon-food credit growth at 15.1%)."

SUVODEEP RAKSHIT, SENIOR ECONOMIST, KOTAK INSTITUTIONAL EQUITIES, MUMBAI

"1QFY23 GDP growth at 13.5% (GVA growth at 12.7%) was lower than expectations. While due to a favourable base (second covid wave impact in 1QFY22), growth optically seems quite strong, the underlying growth would be a tad soft. Compared to 1QFY20 levels, 1QFY23 would be less than 4% higher."

"In terms of growth rates, the prints will be much lower from 2Q onwards as the base effect wears off. While growth until now has held up as services sector has been seeing some rebound, the downside risks will increase from 2HFY23 as the global economy risks lose steam. We remain cautious on domestic growth too, though relatively India is likely to perform better than other economies."

A PRASANNA, HEAD-FIXED INCOME RESEARCH, ICICI SECURITIES PRIMARY DEALERSHIP, MUMBAI

"The Q1 GVA and GDP growth are below our expectation with mining and manufacturing witnessing downside surprises. It is likely that high input costs weighed on gross margins and that led to slower GVA growth despite strong volume growth evidenced in IIP."

"On the brighter side, services growth is strong and that testifies to continuing shift in demand from goods to services as pandemic fades away. Looking ahead, high frequency data indicate that activity is strong in Q2. We continue to expect domestic demand to remain strong even as headwinds from global slowdown would impact exports. We assess some downside risk to our and RBI estimate of 7.2% growth for the full year."

"We continue to expect RBI and MPC to hike rates by a cumulative 60 bps across Sept. and Dec. meetings. Once repo rate reaches 6%, MPC might want to pause to take stock. However, rates may need to head higher if RBI wants to bring down inflation to 4%. Continued large rate hikes by the U.S. Federal Reserve and Fed funds rate hitting 3.75-4% will also weigh on USD/INR and that is another argument for pushing repo rate well above 6%."

RADHIKA RAO, SENIOR ECONOMIST, DBS BANK, SINGAPORE

"Reopening of the service sector was a key source of support for 1QFY23 headline growth, contributing to over two-third of the lift. On the demand end, consumption held ground, as did fixed asset investments, whilst high commodity prices led net exports to emerge as a significant drag."

"Notwithstanding the slight miss in Jun22 quarter growth vs official projections, the RBI MPC is focused on tackling inflation and the GDP outcome is unlikely to alter the rate hike path."

"With 140bp worth tightening behind us, we look for 60bp more hikes in the repo rate within this year, which will leave the real rate in positive territory by end-FY23."

SAKSHI GUPTA, PRINCIPAL ECONOMIST, HDFC BANK, GURUGRAM

"GDP growth rose by 13.5% in Q1 led by a low base from last year. That said, there are signs of sequential recovery in certain sections, especially in contact intensive services. Manufacturing growth was disappointing while agriculture growth was on the positive side."

"Going forward, we expect growth to be close to 7% for the whole year and close to 4.5% average in H2. Given the rising global headwinds, downside risks to growth remain and the RBI is unlikely to be ultra aggressive in monetary tightening — like the Fed. We expect a smaller 25bps rate hike in the September policy."

(Reporting by Chris Thomas, Rama Venkat and Nishit Navin in Bengaluru; Editing by Krishna Chandra Eluri)