Last week the 10-year benchmark bond yield hit over two-year high as the minutes of the monetary policy committee (MPC) revealed the preference of a member “to vote for a beginning of the withdrawal of accommodation in the next MPC meeting in June.” This is perhaps the strongest guidance given by an MPC member ever. However, the Reserve Bank of India (RBI) should defer the rate hike at least for two more quarters.

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First of all, the rate sensitive sectors are not doing well for example, housing prices fell by an average 7% during January-March in nine major cities over the previous quarter and there is no major drop in the inventories of real estate sector. The unsold housing stock fell by 2% but still remain at an elevated level at 595,074 units during March 2018 quarter.

India’s merchandise exports also fell 0.7% yoy to $29.11 billion in March 2018. India’s garment exports contracted for six months in a row in February 2018. Apparel exports dropped almost 4% in FY2018. Consequent to banking frauds, now export of jewelries also impacted very badly. Exports in FY2019 also may be impacted due to rising protectionism across the world and tightening of export credit by the Indian banking sector. The role of credit in these sectors is quite crucial.

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Though the public investment has picked up, the private investments haven’t improved significantly. Although the IIP (Index of Industrial Production) has picked up in the recent months, the cumulative growth for the period April-February FY2018 still remains lower at 4.3% yoy as compared to 4.7% during the corresponding period of previous year. The banking credit growth has picked up in double digits, however, the consumer loans dominate the incremental credit flows. Can consumer segment keep doing well when hard sector like industrial sector fail to grow faster?

The banking sector’s NPAs are still peaking-gross NPAs expected to shoot up to up to 11% in the March quarter from 9.4% a year ago. Many debt restructuring issues, especially the ones, referred to NCLT, are yet to be resolved. At this juncture, the rate hike could derail the resolution process in some cases.

Any hurry to hike the interest rates, otherwise, would be a major setback to India’s economic growth at this juncture.

By G Chokkalingam
(The writer is the founder and managing director, Equinomics Research and Advisory)

Source: DNA Money