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SBI worried over weak demand, seeks rate cuts

State Bank of India, the country’s biggest bank has expressed concern over continuing weak demand in the economy due to “entrenched disinflationary impetus and weak demand,” and suggested that the RBI should cut key interest rates.

While economic growth is moderately strong right now, it said, these factors will impact IIP (Index of Industrial Production) readings in the coming two months.

“We believe that due to continued tepid credit growth and subdued commercial vehicle sales in recent period, a negative impact may precipitate in June/July 2015 IIP,” the bank said, announcing its reading for April for its Composite Index of economic activity. The Index is used to indicate whether the economy is growing or falling. “We are overtly concerned regarding the weak demand conditions that is refusing to pick up.”

“It is imperative to improve sentiments further through another round of monetary easing. Interestingly, recently Spain, France and Italy growth accelerated on the back of strong household consumption (albeit boosted by energy consumption), defying the negative messages from the persistently weak manufacturing PMIs. Why can’t it also happen in India,” it asked.

sbi-chart

The Reserve Bank of India (RBI) has steadfastly refused to give in to demands for rate cuts from banks, companies and the government, expressing its preference to see inflation brought firmly under control. India’s key interest rates, at around 7.5%, are among the highest in the world.

For May, said SBI, the index reading was 56.4 (High growth), but growth is unlikely to sustain in the coming months.

“This will subsequently reflect in our Composite Index values, going forward. We are overtly concerned regarding the weak demand conditions that is refusing to pick up,” it said.

“Though some of the companies have been able to manage top line growth, deterioration in EBIDTA margins reflect the kind of strain in the books of the companies. These companies may not be able to continue the same way for a longer period since as competition increase, addition of volume from other than core business may be at a cost and affect bottom line too,” it added.

The Index is based on two components of the manufacturing cycle, namely month-on-month and year-on-year growth on a scale of 0 to 100. Index above 50 implies growth over previous respective period and less than 50 will suggest a contraction over respective period.

NEGATIVE INFLATION

It also said that retail inflation is likely to be at sub 4% within the next 2-3 months. “This will not be a result of only base effect, as widely believed,” it said.

“This is already undershooting RBI projections (5.8% by Mar’16) by 40-50 basis points as off now. Wholesale prices will remain in deep negative territory for most part of 2015, if not the entire duration.”

The composite index reading was 58.2 in May.

“The positive thing is that the Government is planning to come out with several project initiatives. We feel that the infra activities will start possibly from the second half of this year as the Government would be in a position to push the projects and schemes in the next six months. Rating upgrades are seen in Mid-sized companies (Operating Income between Rs 100 crore to Rs 500 crore) showing expectations of better result in 2015-16, that had seen the most stress.”

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