India Nowcasts 7.35% 2Q Growth But Flags Crude, Food And Kharif Risks In Monthly Review

India's economy likely grew 7.35% in the July–September quarter, the Department of Economic Affairs said in its Monthly Economic Review for October, released on Thursday. It cautioned, however, that elevated crude oil prices, rising food inflation and an uncertain kharif harvest could test policymakers in the second half of the financial year.

The estimate, generated by the department's nowcasting model, follows real GDP growth of 7.8% in the April–June quarter. The review said India's growth momentum has held firm even as the global economy slows in the aftermath of the conflict in the Middle East. High-frequency indicators spanning industrial output, energy consumption, port traffic, GST collections and automobile sales recorded stronger growth in the second quarter than in the first.

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Gross GST collections rose around 15% in the quarter, up from about 8.4% in the preceding three months. Domestic automobile sales grew about 25% year-on-year, with expansion across rural and urban markets. The review noted that a favourable base effect partly amplified the increase, as buyers had deferred purchases last year ahead of the GST rate cuts. Industrial production expanded 8% in August, led by 9% growth in manufacturing, while the index of eight core industries grew 7.9% in September. The HSBC India Manufacturing PMI rose to a seven-month high of 55.1 in September, and bank credit grew 21.6% as of Sept. 30.

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The improved momentum has prompted a round of upgrades. The International Monetary Fund raised its FY27 growth forecast for India by 0.6 percentage points to 7%, while the World Bank, the OECD and the Reserve Bank of India now project growth at 7.1%.

Inflation Worries Linger

The review, however, struck a cautious note on prices. Retail inflation accelerated 71 basis points to 5.54% in September, driven by food inflation of 7.74% and a partial pass-through of higher global fuel prices. Onion prices more than doubled as stocks from the previous rabi harvest ran low and kharif arrivals were delayed by nearly a month. Sugar, edible oils and rice also turned dearer. Wholesale inflation climbed to 11.39%, led by the fuel and power segment.

The department noted that about 64% of items in the consumer price basket still recorded inflation below the 4% target, and that second-quarter inflation averaged 4.94%, in line with the central bank's forecast. With price pressures persisting, the RBI raised the repo rate by 25 basis points to 5.50% this month and changed its stance from neutral to calibrated tightening. The central bank expects inflation to peak at 6% in the October–December quarter.

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The farm outlook adds to the uncertainty. Cumulative monsoon rainfall between June and September was 13% below the long period average, with the east, northeast and southern peninsula recording the steepest shortfalls. Kharif sowing trailed last year's levels, with rice acreage at 433.62 lakh hectares against 449.18 lakh hectares a year earlier. The review warned that an intensifying El Niño could hurt soil moisture during the upcoming rabi sowing season. It said government measures, including customs duty cuts on crude edible oils and onion supplies through the ‘Kanda Express', are expected to ease pressure on kitchen staples.

On the external front, the current account deficit widened to $18.3 billion in April–August from $12.8 billion a year earlier. Strong banking capital inflows nonetheless kept the overall balance of payments in surplus, and foreign exchange reserves stood at $721 billion as of Oct. 16, enough to cover 10.3 months of imports.

The department said robust domestic demand, sustained investment and a resilient financial sector should help India sustain its expansion through the rest of the year, while geopolitical frictions, energy price volatility and global financial tightening remain key headwinds. “Eternal vigilance is the price of macro stability in a fractious global environment with high supply uncertainties,” the review said.

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