India’s GDP grew 6.3% annually year over year in the July-September quarter of 2017, missing expectations of 6.4%, per a Bloomberg survey. However, it rebounded from 5.7% growth in the previous quarter, which was a three-year low, owing to headwinds related to Modi’s demonetization move in November and the introduction of a major tax reform in the form of Goods and Service Tax (GST).

The Reserve Bank of India (RBI) kept the interest rate unchanged at 6% in its October monetary policy meeting, owing to fears of rising inflation. The strong GDP growth figure is expected to provide support to the central bank to hold rates in its December Monetary Policy meeting.

In November, Moody’s Investor Service upgraded India’s sovereign rating by a notch, backing primeminister Narendra Modi’s reforms. The rating agency raised India’s rating to Baa2 from Baa3 and changed the outlook to stable from positive, leading to a rally in the currency, stocks and bonds.

Economic Fundamentals

The agency stated that although the reforms initially caused GDP to slow down, these will be beneficial in the long run. Manufacturing activity accelerated as companies restocked their inventories after GST GST-related headwinds weighed on production. On a year-over-year basis, the manufacturing sector grew 7% in the quarter compared with 1.2% in the previous quarter.

However, on a year-over-year basis, private consumption growth slowed slightly in the quarter to 6.5% compared with 6.7% in the previous quarter, as GST GST-related discounts made consumers shop more in the first quarter. Moreover, on a year-over-year basis, farm sector growth slowed to 1.7% in the second quarter compared with 2.3% in the first.

What Lies Ahead?

Markets are scaling new highs. With strong GDP growth data, investors are more optimistic about economic reform- related headwinds taking a backseat. Moreover, in the latest World Bank rankings, India jumped 30 positions to 100th in terms of ease of doing business. This is also expected to give FDI a boost.