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Expect real GDP growth at ~5.7% YoY in 3QFY25

Real GVA growth could improve to 6.1-6.3%

* India’s real GDP grew by an unexpected 5.4% YoY in 2QFY25, compared to the market expectation of 6.5%, RBI’s projection of 6.7%, and our forecast of 6.2%. Naturally, the market participants were surprised and revised their GDP growth projections for FY25 and FY26.

* Various growth forecasts for 3QFY25 and 2HFY25: The RBI reduced its growth forecasts, though it still projects real GDP to grow 6.8% YoY in 3QFY25 (down from 7.4% projected in Oct’24), according to the Monetary Policy Committee (MPC) meeting of Dec’241 . The Economic Survey 2024-25 pegs FY25 real GDP growth at 6.4%, and the market consensus – according to Bloomberg2 – is 6.4% YoY in 3Q and 6.3% for the full-year FY25 (down from 6.7%/6.9% in Oct’24). It means that with 6% YoY real GDP growth in 1HFY25, the RBI is projecting growth of ~7% YoY in 2H, the Economic Survey sees it at around 6.8%, and the market consensus is close to 6.5%. We, at MOFSL, had predicted a growth of 6.1% in FY25 in Sep’24, which was revised down slightly to 5.8% after 2QFY25 data was published by the Government. We also expected that real GDP growth would remain muted at 5.4% in 3Q, the same as in 2QFY25.

* We expect real GDP growth at ~5.7% in 3Q; real GVA growth could pick-up and reach 6.1-6.3%: Now that almost all high-frequency data3 related to 3QFY25 is available (Exhibit 1), we update our 3QFY25 forecast. We have slightly revised up our 3QFY25 growth projection. While real GVA growth could pick up to 6.1-6.3% YoY in 3Q from 5.6% in 2Q, real GDP growth could remain below 6% for the second consecutive quarter in 3QFY25 (Exhibit 2). This would broadly be due to very weak growth in net indirect taxes because of a very unfavorable base effect (Exhibit 3). This is in line with our in-house economic activity index (EAI) published early this month for 3QFY25.

* Sub-6% real GDP growth to reignite concerns: Weak GDP growth must be analyzed in conjunction with an improvement in real GVA growth. However, a real GDP growth of sub-6% would be another big setback for the economy and the financial markets. Real GDP growth projections would again be revised downwards. Questions and doubts will be raised over the corporate earnings cycle. Pressure could build on the INR against the USD, and the demand for quick and sharp rate cuts by the RBI will intensify.

* A 6.0-6.5% growth in 3Q could soothe the markets: In contrast, a real GDP growth of 6.0-6.5% in 3Q would ease market sentiments, helping to overcome the forgettable 2QFY25 growth data. Official growth projections will still be cut, and it will likely make the 3QFY25 data more like a non-event. This would also help participants realize that very high economic growth in FY24 was exceptional and help orient their expectations to a moderate level.

* Real GDP growth of above 6.5% in 3Q to reset expectations positively: Anything above 6.5% in 3QFY25 would confirm that the 2QFY25 dip was actually a one-off, and we will revise our forecasts upward though high official projections will be retained for FY25. If so, financial markets will surely cheer the strong growth, confirming India’s place as the fastest-growing economy amid the uncertain global economic outlook.

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