India’s GDP growth falls to 5.3%

It is the weakest growth pace in eight years amidst supply constraints.

DBS Group Research noted:

GDP growth dropped to 5.3% (YoY) in 1Q12, the weakest growth pace in eight years. Despite this, inflation and current account deficit persist suggesting the slowdown is driven by supply constraints and is structural.

Given limited room for monetary policy easing, headwinds from global growth uncertainties and pressure to rein in the fiscal deficit, GDP growth is expected to ease to 6.2% in 2012/13 (Apr-Mar), lower than the 6.5% rate in 2011/12 and well below consensus of 7.4%.

Further trade-weighted rupee depreciation lies ahead as sparse capital inflows force adjustments on the external balance.

Twin deficit challenges and vulnerabilities to external shocks will be compounded if the policy response to the slowdown is largely monetary loosening and the price for fiscal correction, higher taxes or business costs.