Q2 GDP Growth: A sequential recovery, but headwinds ahead

Mumbai, 01st Dec., 2022 (GNI): GDP growth in Q2 FY23 stood at 6.3% y-o-y (in line with our forecast) compared to 13.5% in Q1. To recall, the first quarter numbers had been bumped up as the low base from the pandemic years had continued to distort the y-o-y figures. From the supply side, GVA (Gross Value Added) growth stood at 5.6% y-o-y (lower than our expectations) widening its gap with GDP growth (70bps) in the second quarter (possibly due to higher tax collections, GDP = GVA + Net Taxes).

We are holding on to our FY23 annual GDP forecast of 6.8% and expect growth in Q3 & Q4 to be between 4-4.5%. For FY24, we expect GDP growth of 6.3%, with downside risks to our forecasts. There are risks stemming from the slowdown in global growth and impact of inflation and tighter financial conditions on the consumption recovery. On the policy front, this GDP print does not change our view on RBI’s rate action in December. Inflation remains above the RBI’s upper tolerance band and warrants a further increase in rates. We continue to expect a 35bps rate hike in the next policy and then a 25bps in the February policy, which would take the policy rate to 6.5% by fiscal year end.

GDP & GVA growth trend %y-o-y

Source: CEIC, HDFC Bank