India’s July-September 2009 real GDP growth came in at 7.9% yoy, much higher than the 6.1% yoy growth in the previous quarter and overshooting consensus expectations of 6.3% yoy and our estimate of 6.4% yoy by a big margin. The sequential momentum leaped 13.1% qoq s.a. annualized, from 8.3% qoq in the previous quarter.
While trends in industry (8.3%) and services (9.3%) were broadly in line, agriculture surprised on the upside with a positive reading of 0.9%. Although we had factored that most of the 17.9% production decline in the summer crop would take place in 3QFY10 (Oct-Dec). Perhaps the most encouraging data point is the 9% rise in non-farm GDP in 2QFY10 v/s 6.9% last quarter.
And What is likely to Happen:
The recovery in activity will drive the INR stronger and expect the RBI to start hiking rates in January. Expect WPI inflation to move rapidly from 1.5% in October to 6.5% by March 2010. The latest GDP and IP readings suggest that risks to both growth and inflation are to the upside. Therefore, we expect 300 bp of effective tightening in policy rates in calendar year 2010,in part by moving the effective policy rate from the reverse repo rate to the repo rate.
The non-agriculture details are positive and encouraging but less impressive than the headline GDP outcome. There is a high probability that growth in agriculture output will be revised down.
You are right, As WPI inflation moves higher, measures (such a hike in cash reserve ratio or CRR) to shrink excess money market liquidity