CNBC's Inside India newsletter: What are the prospects for India following a significant GDP growth disappointment?

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The big story

As India's new fiscal year commenced in April, anticipations were high for the following 12 months to yield robust economic growth, remarkable stock market gains, and a significant boost towards its objective of being the world's third largest economy by 2027.

The unexpected plot twist in India's latest GDP numbers was reminiscent of a Bollywood blockbuster.

According to figures released on Nov 29, India's growth rate for the quarter ended September was 5.4%, which was the slowest pace of expansion in the last seven quarters. This growth rate was below the 6.5% growth rate anticipated by economists in a Reuters poll.

Few analysts expected the slowdown in economic growth to be as severe as it turned out to be, despite anticipating a modest decrease compared to the 6.7% growth recorded in the previous quarter. The impact of higher inflation on household and business spending was partly responsible for this slowdown.

Analysts at Macquarie believe that growth was hindered by a decrease in urban consumption demand. India's expanding middle class has been viewed as the driving force behind the country's growth, with spending on goods and services crucial in boosting consumption levels and corporate profits.

In October, India's retail inflation rate reached a 14-month high of 6.2%, mainly due to a significant increase in the prices of vegetables, which are a staple in most Indian households. The prices of vegetables rose by 42.2% in October compared to the same month last year, and by 36% in September.

Macquarie's analysts observed that reduced spending by India's households has affected corporates, resulting in weak earnings momentum in the September quarter.

Other factors, including sluggish capital expenditure, investment activity, slower exports, and a significant slowdown in credit growth, also contributed to India's economy.

The growth in overall credit, which is said to drive GDP by Macquarie analysts, was around 11% in the September quarter, lower than the 16% increase seen in the same period last year, the analysts stated.

The latest GDP data has not caused any unnecessary concern.

The Nifty 50 index has risen modestly since the GDP release and is up 13.7% since the start of the year, while the MSCI Asia ex Japan index, which invests nearly 23% of its funds in India, is down around 12% so far this year.

The Reserve Bank of India, set to reveal its latest rate decision on Friday, is predicted to maintain interest rates unchanged.

What lies ahead?

Divining the outlook for the rest of the financial year is tricky.

In 2025, India's economy is predicted to slow down, according to Alicia Garcia Herrero.

Natixis' chief Asia-Pacific economist stated on CNBC's Squawk Box Asia last week that when we use the term "slower growth," we do not mean a collapse. Our current forecast predicts growth of 6% - 6.4%, but it could potentially be a 6%. This was said hours before the GDP numbers were announced.

Krishna Bhimavarapu, APAC economist at State Street Global Advisor anticipates some "downside risks" to India's economy in the near future. Although he does not foresee "a significant impact" over a longer-term period of 20 years, Bhimavarapu emphasized the importance of policy measures to address economic gaps and prevent future risks.

To maintain the Indian growth story, investors must avoid a repeat of the September numbers.

Need to know

Gautam Adani, the founder of Adani Group, spoke out at an event on Saturday, stating that the company is committed to upholding world-class regulatory compliance. However, he did not provide further details on this assertion. On Friday, the CFO of Adani Group rejected all allegations, and on Wednesday, Adani Green Energy filed a rebuttal to the claims of the indictment, which led to an increase in the shares of the Adani Group.

One of India's largest automakers has unveiled two electric vehicles priced around $25,000, positioning itself for market share in a country where EV adoption is low and where the domestic market is dominated by one manufacturer. The company's announcement has sparked optimism among analysts, who are even more bullish on the company's prospects.

What happened in the markets?

This week, the Indian stock index gained 2.4%, reaching 24,708.40 points. The index has experienced a 13.7% increase in value this year.

Since the end of last week, the Indian government bond yield has decreased by over 10 basis points to 6.67%, due to the slowing GDP growth rate.

Jae Lee from TCW Group advised on Biz Focus Hub that India should not be directly targeted by Trump's tariffs. However, if China's yuan depreciates due to tariffs, it may be challenging for India to maintain a strong currency, according to Lee.

What's happening next week?

On December 6th, India will announce its interest rate decision, the US will release its nonfarm payrolls for November, China will disclose its inflation rate for the same month, and Suraksha Diagnostic will go public.

On December 9th, Japan will release its final reading of GDP for the third quarter, as well as the initial public offering (IPO) of the Property Share Investment Trust REIT.

December 11: U.S. consumer price index for November

November 12: India inflation rate for December, U.S. producer price index for December, European Central Bank interest rate decision, U.K. GDP for November.