Q2 GDP print unlikely to put brakes on market rally; RBI rate cut likely on December 7

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NEW DELHI: India’s economic growth picked up in the second quarter of the financial year, but it was slightly lower than analyst estimates. However, that did not disappoint analysts, as the trajectory of the stock market still looks upward.

Data released by the statistics office showed the domestic economy expanded 7.3 per cent during the July-September quarter, which was at a faster clip than the 7.1 per cent growth reported for the prior three months, but below the 7.6 per cent jump recorded in the year-ago period. The data print missed the 7.5 per cent median estimate of economists.

The economy is likely to experience a slowdown in the coming quarters, which may push the Reserve Bank of India (RBI) to cut policy rates by at least 25 bps at its forthcoming policy review on December 7.

Demonetisation is likely to have a short-term negative impact on GDP growth, which may last up to a quarter or two, say experts. But the long-term impact of demonetisation will be quite positive for economic growth.

“GDP was reported at 7.3 per cent, up from 7.1 per cent of the previous quarter. Going forward, we do see erosion in growth, given the shock of demonetisation that has largely affected demand in the economy due to liquidity crunch,” Indranil Pan, Chief Economist, IDFC Bank, told ETMarkets.com.

“While passing days will help ensure better clarity on the quantum of growth erosion, we see Q3 being the weakest. Beyond that as RBI replenishes currency in circulation, we expect growth to revive back reasonably in the fourth quarter,” Pan said. He pegged the full-year GDP growth at 6.9 per cent and expects RBI to reduce repo rate by 25 bps on December 7.
Going by the buzz on Dalal Street, here is what some of the economists and analysts had to say about the impact of GDP numbers on the market.

Sunil Kumar Sinha, Principal Economist, India Ratings & Research

The second quarter GDP and GVA growth at 7.3 per cent and 7.1 per cent, respectively, are lower than expected. Ind-Ra believes these numbers itself would have warranted a relook at the GDP/GVA growth of the FY17.

There are several areas of concern namely mining quarrying, electricity, construction and even trade, hotel, transport, and communications. Given that cash transaction is quite significant in the case of the latter two segments of GDP, the impact of de-legalisation is going to be severed on these sectors.

Alok Ranjan, Head of Research, Way2Wealth Brokers

Demonetisation is likely to have a short-term negative impact on the GDP growth that may last up to a quarter or two. However, we believe the medium-to-long-term impact of demonetisation will be quite positive for economic growth.

We don’t expect just declared GDP numbers to have much impact on the markets as the numbers are more or less in line with expectations. Markets are forward looking and in the short-term they might be looking forward many central bank policy review meetings during next two weeks including RBI and US FED meet.

Jimeet Modi, CEO, SAMCO Securities

Going by the recent numbers, the next quarter clearly does not look rosy. However the stock market will be slightly disappointed with the current set of numbers, but it will be just a knee jerk reaction, as what matters to the market is the future and not post mortem analysis of past quarter.

Reduction in GDP numbers due to demonetization has also been factored in which will make our markets immune to any negative numbers as and when they come.

In a true sense, stock market is guided by liquidity in the system and GDP numbers are just symbolic events. The system is gush with liquidity which will propel markets to higher levels.

Rajesh Cheruvu, Head of Equities, Sanctum Wealth Management

The declared GDP numbers came as a marginal disappointment against the expectations of Bloomberg Consensus survey of economists. Other than Agriculture sector broadly most of the sectors and subsectors have slowed in the 2Q. The rise in both Private and Government led consumption are supportive.

We think economic growth could take the slower lane in the current quarter owing to the implications of demonetization on the business activity overall. Markets are factoring weaker GDP growth and corporate earnings for Q3 of FY17.