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Continued rupee depreciation and the significant costs of Reserve Bank of India intervention in the forex market could result in at least one more rate hike, possibly front-loaded, according to State Bank of India’s research report ‘EcoWrap’.
The RBI had raised the policy repo rate (the rate at which it provides funding to banks to overcome short-term liquidity mismatches) twice, by 25 basis points each, in the June (second bi-monthly monetary policy review) and August (third) bi-monthly monetary policy review to 6.50 per cent.
“The RBI’s successive rate hikes will have a heavy toll on private consumption expenditure. During FY14 three successive rate hikes led to a collapse of private consumption expenditure to 2 per cent in Q3 FY15,”
A front-loaded rate hike could lead to sub-7.5 per cent growth for FY19 despite more than 8 per cent growth in Q1. “This is going to be most important predicament going forward,” said Soumya Kanti Ghosh, Group Chief Economic Advisor, State Bank of India.
Non-agri growth
The nominal non-agri GVA (gross value added) has expanded from 11.5 per cent in Q4 (January-March) FY17 to 14 per cent in Q1 (April-June) FY19. During the same period, nominal Agri GVA, however, declined from 10.9 per cent to 7 per cent.
“We believe that the farm sector, especially the crop sector, needs policy support to supplement the increased minimum support price; the government should enhance its effort to procure crops.
“Apart from this, we strongly maintain that the agriculture sector needs an immediate intervention like Bhavantar scheme (a price-deficit financing scheme whereby the State pays the farmer the difference between the average commodity price at mandis and the MSP) recently launched,” said Ghosh.
The SBI report said that though the agriculture and allied sector GVA increased to a five-quarter high, to 5.3 per cent, this was mostly driven by the livestock products, forestry and fisheries component expanding at 8.1 per cent. Stripping aside this, the agri growth mean reverts to around 2.5 per cent.
“But the worrying sign continues to be agriculture prices that are still languishing at 1.6 per cent for Q1. Additionally, through the current GDP deflator method, we may be even imparting an upward bias to it,” said the report.
Gross Domestic Product growth came in at 8.2 per cent in Q1 FY19 compared to 5.6 per cent growth in Q1 FY18.
Industry grew by 10.3 per cent in Q1 FY19 from merely 0.1 per cent in Q1 FY18, owing to a significant rise in manufacturing (13.5 per cent) and construction (8.7 per cent), both of which, according to the report, have exhibited growth because of a low base and strong Q1 results.
The real estate sector, which was quite disturbed after GST implementation, seems to be reviving.
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