The Indian economy grew 13.5% in Q2, the fastest pace in a year, yet economists have cautioned of a slowdown in future quarters as soaring interest rates impact activity.

Since May, the Reserve Bank of India (RBI) has increased its benchmark repo rate by 140 basis points, including 50 basis points in August, whilst issuing a warning about the effect of a worldwide slowdown on domestic growth forecasts.

Annual growth in the second quarter, fuelled by manufacturing and services, was under the 15.2% forecast by economists polled by Reuters, but far exceeded the 4.1% growth in Q1.

“Growth in the June quarter is good enough to achieve over 7% annual growth for the whole fiscal year,” T.V. Somanathan, the finance ministry's top official, said after the data was published. 

He added that recent rate increases by the central bank would unlikely affect private investments.

Investment growth hit 20.1% year on year, compared to 15.9% growth in the first quarter, with government spending at 1.3% growth following a 13.2% increase in Q1.

Manufacturing growth reached 6.5% following a 0.2% contraction in the first quarter, whilst construction grew 16.8% in Q2, following 2.0% growth in Q1, the data revealed.

According to Societe Generale economist, Kunal Kundu, the country’s economic recovery process would be affected by a slowdown in domestic consumption and a shaky labour market recovery.

“For FY23, we expect the real GDP to grow by 7.1% y/y, though a lower print (rate) would not surprise us.”

According to the most recent poll carried out by Reuters news agency, economists forecast growth this quarter could register a sharp slowdown to an annual 6.2% before falling to 4.5% in Q4.

The country’s $3 trillion economy has grown under 2% a year on average in real terms over the last three years, following a 6.6% contraction in 2019/20.