Economic Trends Not Favorable for a Rate Hike : SBI | CORPORATE ETHOS

Economic Trends Not Favorable for a Rate Hike : SBI

By: | June 4, 2018

Jun 4: The rise in Gross Domestic Product (GDP) numbers and inflationary trends in the economy there is a clamour for rate hike by Reserve Bank of India (RBI).

State Bank of India’s Economic Research Department (ERD) said in its ECOWRAP report that there are several negative indicators that should dissuade RBI from taking a rate action. Private consumption continues to decline and fell to 6.6% in FY18 from 7.3% in the previous year. GDP growth in FY18 was a result of rise in government consumption.  “In fact, the per capita PCFE (Private Final Consumption Expenditure) has decelerated indicating negative income effect across decile groups.”. Secondly, the CPI inflation has risen by 221 basis points since July 2017 but core inflation has increased by only 98 bps. This was accounted for by Housing (38 bps) and transport (21 bps).

India witnessed muted wage growth of less than 3% in FY18. SBI ECOWRAP report said that since July 2017, the rise in annualized volatility in 10-year G-Sec market along with tightening liquidity is giving a confused signal to both market players as well as the policy makers. Such volatility in bond market could also result in financial instability.

In fact, the per capita PCFE has decelerated indicating negative income effect across decile groups. In particular, nominal agriculture growth expanded by only 4.5% in FY18, against a nominal GVA growth of 9.7%. The crux of the low growth in Agriculture sector was a low deflator (quarterly GVA deflator at 0.4% / GVA deflator at 2.9%) indicating significant softening of rural prices. Thus, there is indeed an urgent need to provide an income support to farmers / MSP price support, as it will create the much needed cushion in rural demand that is still only showing only incipient signs of recovery. Hence in a nut shell, there are still early signs of an impending recovery and all care should be taken to support it and not derail it, the ECOWRAP report said.

Global Economy trends
Global GDP growth is expected to touch 3% in 2018. Rise in commodity price will support commodity exporting countries but will check the growth in commodity importing countries. The world trade has also picked up but its future growth remains uncertain in an environment of rising trade war tensions between the US and China and the US and Europe.

The latest surveys show that there is some early evidence of a slowdown in Emerging Markets Export growth. Chinese exporters are reporting slowing order growth and flat export prices. The FTCR China Export Index is below the average of 55.2 during the previous 12 months, while order growth has dropped to a 10-month low and export prices failed to increase for the first time in seven months. Export growth of Korea has softened in recent months.