Economic Developments and Analysis

The article discusses two significant economic developments: unexpectedly high GDP growth in the second quarter and the domestic currency's depreciation against the dollar.

GDP Growth

• The second quarter GDP growth was much higher than expected, highlighting the economy's structural resilience.
• The economy has benefitted from reforms promoting formalization and a digital-first business approach.
• Rural demand remains strong, while urban demand is recovering due to stabilized inflation and job growth.
• GST rate rationalization is boosting manufacturing, with capacity utilization at around 80%.
• Services sector growth is impressive, especially in finance, real estate, and professional services.
• Industrial growth is driven by manufacturing and construction.
• Real GDP growth is 8% in the first half, with a full fiscal year projection of around 7.6% or higher.
• The demand for a rate cut is hard to justify given this growth scenario.

Consumption and External Factors

• Household consumption trends are positive, supported by leading indicators and business confidence.
• Grain storage is robust, and a good rabi harvest is expected, offsetting any kharif shortfall.
• External factors show no red flags despite slowing capital flows; FDI remains a positive contributor.
• Efforts are underway to diversify exports with policy support.

Credit and Liquidity

• System liquidity is optimal and supports growth.
• Credit growth, including from NBFCs and private entities, is strong, indicated by M&A activity.
• A rate cut could disrupt the growth-inflation balance and affect MPC's inflation targets.
• Household savings in bank deposits stand at 34%, requiring adequate rewards.
• Credit utilization in the MSME sector is significantly above average, indicating robust demand.

Currency Depreciation

• The rupee has fallen beyond the psychological barrier of 90 against the dollar.
• U.S. tariffs on peers like China, Indonesia, Vietnam, and Japan negatively impact the currency.
• Renewed offshore non-deliverable forward market activity influences short-term movements.
• The trade deficit is only slightly higher than last year, hence minimal pressure on the currency.
• Historical trends suggest possible future appreciation following depreciation.

Interest Rate Implications

• If the RBI lowers the interest rate amidst high GDP growth, it would be unprecedented in India's monetary history.