Continued rupee depreciation and the significant costs of RBI intervention in forex market could result in at least one more rate hike, possibly frontloaded, which in turn will lead to sub-7.5 per cent growth for FY19 despite more than 8 per cent growth in Q1, according to State Bank of India's research report 'EcoWrap'.
The Reserve Bank of India had upped the policy repo rate (the interest 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.
"RBI’s successive rate hikes will have a heavy toll on private consumption expenditure. During FY14, three successive rate hikes led to collapse of private consumption expenditure to 2 per cent in Q3 FY15.
"Thus, continued rupee depreciation and given the significant costs of RBI intervention in forex market could result in at least one more hike, possibly frontloaded. This will 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 Adviser, State Bank of India.
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 crop sector, needs policy support and to supplement the increased MSP (minimum support price), 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 though the agriculture and allied sector GVA increased to a five-quarter high of 5.3 per cent, this is mostly driven by 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 which 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.
GDP growth came in at 8.2 per cent in Q1 FY19 compared with 5.6 per cent growth in Q1 FY18. Industry grew 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 low base and strong Q1 results.
Real estate sector, which was quite disturbed after the GST implementation, seems to be reviving. Services GDP grew 7.3 per cent in Q1FY19 compared with 7.7 per cent in Q4FY18 and 9.5 per cent in Q1FY18. Last year, services GDP had grown at a robust pace due to higher growth of trade sub-segment and professional services because of destocking ahead of GST implementation in July17, and this has now moderated.