Can India Sustain 8.9% Q2 GDP Growth ?

India’s GDP growth in 2Q FY11 surprised on the upside, as it accelerated to 8.9% from 8.8% in 1Q on the back of a pick up in agriculture (4.4%) services (9.6%) and Government spending, even as industry growth slowed to 8.6% YoY from 11.3%.

For the Full year, growth forecast is 8.6% (from 8.4%) in FY11E and 8.4% (from 8.2%) in FY12E. In particular, we expect an equally
robust December quarter with agriculture recording strong growth on the base effects of last year’s drought.

With inflation likely to be a bit tricky, we maintain our view of the RBI likely to hike rates by ~75bps during the course of 2011, taking the repo/reverse repo rate to 7.00/6.00% respectively. Therefore, Liquidity can be tight and short rates have spiked, leading to a flattening in the yield curve. The rise in rates can dampen the growth momentum, and our economics team forecasts GDP growth slowing to less than 8% in the next fiscal year.

However, Expenditure side data showing sharp investment growth continue to be plagued by data issues and appear inconsistent with high-frequency indicators.