The macro indicators of the Indian economy like inflation and external balances have improved significantly in the last two years, but developments on the ground belie these strong numbers, a DBS report says.
According to the global financial services firm, beyond “risk tantrums”, India’s macro fundamentals have improved in the last two years.
Inflation has eased and external balances have narrowed considerably, driven by the low global oil prices. Moreover, real GDP has remained above 7 per cent in the past three quarters to December 2015.
“However, developments on the ground belie the strong headline numbers. Private sector participation has been subdued, which has provided little relief to the ongoing deterioration in the domestic banks’ asset quality concerns,” DBS said in a research report.
Meanwhile, the Indian equity index has plunged 12 per cent so far this year, while the rupee touched over 29-month low of 68.37 against the dollar this morning.
“The equity index is close to returning all post election gains since the second quarter of 2014,” the DBS report said adding that foreign equity outflows have totalled to $ 1.8 billion this year, while interests into debt were modest at $ 0.6 billion.
On inflation, the report said that the upcoming public sector wage bill and pension scheme could disrupt the disinflationary phase.
“These concerns saw the RBI keep rates on hold earlier this month, with the contents of the end-Feb budget key to keep the door open for further easing,” the report added.
Reserve Bank Governor Raghuram Rajan on February 2 left key interest rate unchanged citing inflation risks and growth concerns, while pegging further easing of monetary policy on government’s budget proposals.
Rajan said RBI “continues to be accommodative” but would look forward to the government’s budget proposals on February 29 as also the inflation trend.