The Indian economy grew at a nine-quarter high rate of 8.2% y/y in Q1 FY2019, driven by a surge in private consumption, agriculture and manufacturing. Such strong growth levels are especially noteworthy in an environment of global uncertainty and volatile crude oil prices.
India's recent growth may be partially attributed to a weak base effect, as there had been a slowdown in Q1 FY2018 due to an inventory de-stocking ahead of the implementation of the Goods and Services Tax (GST).
Still, we see positive macro-structural changes occurring in India, which are likely boosting fundamentals, and these should aid a more meaningful medium-term recovery if their implementation is ensured. Meanwhile, the external sector remains a drag, and softer investment and services growth may be slight dampeners as well. Growth continues to be government-driven, and private investments are unlikely to grow until the stressed assets issue is closer to resolution and before the election risks subside.
We expect the growth momentum to fade in H2 FY2019 (October 2018-March 2019) as base effects weaken further and election-driven uncertainty picks up. We continue to forecast growth of 7.5% in FY2019, and currently expect no further moves from the RBI in 2018. The Bank is, however, likely to continue a hawkish bias in the medium-term as the Fed and other major central banks wind down quantitative easing, creating ripples in EMs. The rupee is also likely to remain at risk in 2018-19 given the risks from oil prices and global volatility.