GDP First cut

GDP First cut

GDP growth at 7.0% y-o-y in Q1 FY16 was lower than Q4 FY15 and came in below consensus expectations. Consumption growth at 7.4% was slightly lower than Q4 FY15 while investments (4.9%) saw a marginal pickup. 

That said, investment growth continues to be on a fragile footing while consumption is starting to show some signs of recovery - being the largest contributor to GDP growth in Q1 FY16 and recording higher growth in comparison Q1 FY15..

More disappointingly, net exports were a drag on growth. On the supply side, as expected, agriculture growth was below trend at 1.9% while the non-agriculture sector rose by 8.0%.

Looking ahead, we believe that low inflation and easy monetary conditions will remain supportive of growth in FY16. Commodity prices continue to decline and are a positive for consumer oriented sectors such as auto. 

We expect oil prices to average at $ 53.5/barrel in FY16 and $ 51.5/barrel in FY17. In Q1, nominal growth stood at 8.8% as the GDP deflator stood at a meagre 1.7%. Thanks to lower commodity prices and proactive steps taken by the government to put a tap on food inflation.

We expect GDP growth to rise to 7.4% with consumption growth at 6.6% in FY16. This, we believe, will improve capacity utilisation rates and lead to revival of private investments over the next 12-18 months. 

Also, as the expected pick-up in consumption is fragile and investment revival not in sight this year, the case for further monetary easing becomes stronger. With inflation under control, we expect RBI to reduce rates by 25 bps in the current fiscal