Reserve Bank of India Governor Urjit Patel. Photo: Reuters

The uptick in India’s gross domestic product (GDP) after a slump for five consecutive quarters and high inflation will provide its central bank, Reserve Bank of India, enough reason to keep its interest rates on hold during the rate review on December 6.

The benchmark rate is at its lowest in seven years while consumer price inflation has surged to a seven-month high. Moreover, the hardening global crude prices is expected to worsen things on the inflation front.

India’s GDP grew to 6.3% in the second quarter of FY18 against a three-year low of 5.7% in the previous quarter, thereby raising the hope that the country was showing nascent signs of growth after the twin shocks of demonetization of high value currency notes and indirect tax reform,  goods and services tax (GST).

The GDP growth was mainly due to a rebound in manufacturing activity as companies ramped up production to meet the festive demand, pushing up overall economic growth. It rose to 7% after a low of 1.2% in the previous quarter. Investment activity also witnessed an uptick after lacklustre performance in the last two quarters.

However, the agricultural sector’s growth continued to languish at 1.7% owing to a lacklustre monsoon and the lingering effects of demonetization compared with 4.1% in the year ago quarter. The production of foodgrains during the kharif season of agriculture year 2017-18 declined 2.8% while it grew 10.7% in the same period in 2016-17.

Construction sector too registered the lowest growth at 2.6% as compared with growth of 4.3% in Q2 of 2016-17. Key indicators of construction sector, namely, production of cement and consumption of finished steel registered growth rates of (-) 0.4% and 4.1% in this quarter, compared with 3.4% and 6.5% respectively during the year-ago quarter.

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