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RBI may hike the repo rate by 50bp in Dec’22

* Real GDP/GVA grew 6.3%/5.6% YoY in 2QFY23 (v/s our forecast of 6.5%/6.4% and broadly in line with Bloomberg consensus), slower than the 13.5%/12.7% YoY growth in 1QFY23 and 8.4%/8.3% YoY growth in 2QFY22. Nominal GDP/GVA growth stood at 16.2% YoY each in 2QFY23 as against 26.7%/28.6% YoY in 1QFY23.

* The details of real GDP suggest that private consumption grew 9.7% YoY in 2QFY23, contributing 5.5pp to overall GDP growth. On the contrary, government consumption contracted by 4.4% YoY in 2QFY23, contributing negatively (-0.4pp) to GDP growth. Additionally, real investments grew 9.2% YoY in 2QFY23, leading to a 3.2pp contribution to real GDP growth. While exports grew 11.5% YoY in 2QFY23, imports grew 25.4% YoY. This led to the external sector contributing - 4.3pp. Discrepancies too contributed 3.3pp to overall real GDP growth in 2QFY23.

* The 5.6% YoY growth in real GVA was held up by faster-than-expected growth in the farm/services sector (which grew 4.6%/9.3% YoY in 2QFY23). Within services, all three components – trade and hotels, financial services, and public administration – performed well in 2QFY23. The industrial sector on the contrary was a drag to real GVA growth, which was propelled by mining and quarrying and manufacturing sector – the contraction of which came as a big surprise. Growth in the other two components – electricity and construction – continued in 2QFY23.

* Our estimate of implied GDS (Gross Domestic Savings) suggests it stood at a 19-year low (in 1H for all fiscals), at 26.2% of GDP in 1HFY23. Investments, at 31.8% of GDP in 1HFY23, are similar to levels seen in 1HFY22.

* A sharp contraction in the manufacturing sector was a big surprise in the 2QFY23 data. Moreover, high inflation seems to have impacted domestic savings in 1HFY23. Going forward, we expect real GDP growth of 4.5% YoY in 2HFY23, leading to a FY23 growth of ~7% YoY. As to its likely influence on RBI’s monetary policy decision on 7th Dec’22, we do not think that it will cause any change. Although the market consensus is on a 35bp rate hike in Dec’22, we believe that a 50bp hike cannot be ruled out.

I. Real GDP growth stood at 6.35% in 2QFY23

* Real GDP expands by 6.3% YoY in 2QFY23: Broadly in line with Bloomberg consensus and lower than our forecast of 6.5% YoY, real GDP growth stood at 6.3% YoY in 2QFY23 v/s 13.5%/8.4% YoY in 1QFY23/2QFY22. With this, real GDP growth stood at 9.7% YoY in 1HFY23 as against 13.7% YoY in 1HFY22.

* Private consumption and real investments held up GDP growth in 2QFY23…: The details of real GDP suggest that private consumption grew 9.7% YoY in 2QFY23 (v/s 25.9% YoY), contributing 5.5pp to overall GDP growth. On the contrary, government consumption contracted by 4.4% YoY in 2QFY23, contributing negatively (-0.4pp) to GDP growth. Additionally, real investments (GFCF + stocks) grew 9.2% YoY in 2QFY23 (v/s 18.7% YoY in 1QFY23), leading to a 3.2pp contribution to real GDP growth.

* …and net exports were a drag; ‘discrepancies’ surprised in 2QFY23: While exports grew 11.5% YoY in 2QFY23 (v/s 14.7% YoY in 1QFY23), imports grew 25.4% YoY (v/s 37.2% YoY in 1QFY23). This led to the external sector contributing -4.3pp. Discrepancies too contributed 3.3pp to overall real GDP growth in 2QFY23.

II. GVA growth was lower-than-expected in 2QFY23

Real GVA grew 5.6% YoY in 2QFY23…: Real GVA grew 5.6% YoY in 2QFY23 v/s 12.7%/8.3% YoY in 1QFY23/2QFY22. The number is lower than both Bloomberg consensus of 5.9% YoY and our forecast of 6.4% YoY in 2QFY23. This implies that real GVA grew 9% YoY in 1HFY23 as against a growth of 12.8% YoY in 1HFY22.

…on the back of a faster-than-expected industry and services growth: The 5.6% YoY growth in real GVA was held up by faster-than-expected growth in the farm/services sector (which grew 4.6%/9.3% YoY in 2QFY23 v/s 4.5%/17.6% YoY in 1QFY23). Within services, all three components – trade and hotels, financial services, and public administration – performed well in 2QFY23. The industrial sector on the contrary was a drag to real GVA growth. It contracted 0.8% YoY in 2QFY23 v/s 8.6% YoY growth in 1QFY23. The drag was propelled by mining and quarrying and manufacturing sector – the contraction of which came as a big surprise. Growth in the other two components – electricity and construction – continued in 2QFY23.

III. India’s domestic savings at a 19-year low in 1HFY23:

Implied GDS at 26.2% of GDP in 1HFY23: Investments, at 31.8% of GDP in 1HFY23, are similar to levels seen in 1HFY22. The quarterly data on net exports suggest that implied GDS fell to a 19-year low of 26.2% of GDP in 1HFY23.

IV. Expect real GDP to grow by 4.5% YoY in 2HFY23:

A sharp contraction in the manufacturing sector was a big surprise in the 2QFY23 data. Moreover, high inflation seems to have impacted domestic savings in 1HFY23. Going forward, we expect real GDP growth of 4.5% YoY in 2HFY23, leading to a FY23 growth of ~7% YoY. As to its likely influence on RBI’s monetary policy decision on 7th Dec’22, we do not think that it will cause any change. Although the market consensus is on a 35bp rate hike in Dec’22, we believe that a 50bp hike cannot be ruled out.

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