With Q2 GDP print at 8.4%, will RBI wind down its accommodative stance now?

The GDP growth at 8.4 per cent in the second quarter of the current fiscal ending September 30, which is more than that of the MPC's forecast of 7.9 per cent and SBI's projection of 8.1 per cent, has surprised everyone. There are two aspects attached to it. First, GDP growth for the current fiscal may cross RBI's projection of 9.5 per cent. Secondly, it is an indication that RBI may continue to hold its key policy rates when it reviews its annual monetary policy later during the week. Still, the rate hikes are not far off.

Not to mention that Jayanth Varma, one of the six-member monetary policy committee, which is responsible for taking a call on key policy rates, has been advocating for a hike in key policy rates for two bimonthly policy review meetings of MPC in a row.

The soothing news is that new investment announcements in current year, as per SBI report, looks encouraging with around Rs 8.6 lakh crore investment announcements made so far in last seven months of FY22 (around Rs 11 trillion reported in last year). With private sector contributing around 67 per cent of this or Rs 5.80 lakh crore, it seems private investment revival is on the horizon. Also, SBI Business Activity Index at 110.7 for the week ended November 29 indicates further pick-up in economic momentum. If this happened so, GDP growth rate is unlikely to decelerate in near future.

Of course, GDP growth has got its own challenges. The foremost among them being the echoes of the fast-spreading latest virus strain, Omicron, declared a 'variant of concern' by an edgy WHO seem to have reignited the worst fears of multiple nations, more so in view of the increased chances of reinfection posed by its 30-plus strains, even as researchers are frantically upping the ante to confirm the seemingly enhanced levels of transmissibility and severity of infection against effectiveness of vaccine doses administered, and also the worrisome status of other vulnerable groups amidst vaccine distribution inequality.

Coming back to the status of key policy rates, even though the Q2 GDP number is marginally higher than the year-ago period, RBI is not likely to raise its key policy rates when it reviews its annual monetary policy later this week.

After a broadly healthy festive season, as an Icra study says, many indicators displayed a flagging momentum in November, suggesting that the revival in economic growth is yet to become durable. It is despite the fact that agriculture has performed well on the back of a good monsoon.

Nevertheless, the Q2 growth rate above 8 per cent has propelled India as the world's fastest-growing major economy. Economic activities are back to normalcy post second wave earlier this year. This is the fourth consecutive quarter of positive growth after a two-quarter negative growth witnessed last year.