ECONOMY FORECAST
Investment activity is likely to revive in the mid term
Key Economic Forecast - Sep 2016
| Real Economy: |
While 7th Pay Commission payouts ahead of the festive season is likely to support the consumer goods segment, slowdown in flow of financial resources to the commercial sector, low capacity utilization and high leverage in the corporate sector coupled with the base effect is likely to keep IIP muted. D&B expects IIP to have grown by 0.5%-1.5% during Aug-16.
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| Price Scenario: |
Pressure on food prices are likely to ease as supplies hit the market. Sowing of pulses has been at a record high and monsoon has been normal and spatially well distributed. This could be partly offset by the demand side pressures emanating from the forthcoming festive season and the narrowing of output gap which is likely to impact the other commodities (non-food) in the CPI basket. The WPI inflation on the other hand is likely to inch up given firming up of inflation in the fuel group along with the statistical base effect. D&B expects the WPI inflation to be in the range of 3.8%- 4.0% and CPI inflation to be in the range of 4.7% - 4.9% during Sept 16, respectively.
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| Money & Finance: |
The RBI's move to support liquidity through more open market operations (OMOs) and market optimism of rate cut given significant fall in CPI inflation are likely to keep yields across maturities lower. D&B expects 15-91 day T-Bill yield to average at around 6.4%-6.6% and 10-year G-sec yield at around 7.0%-7.2% during Sep 16.
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| External Sector: |
While increase in the forex reserve and improvement in current account are likely to provide some cushion to Indian rupee in the short term, increase in probability of Fed hiking the interest rate towards end of 2016, liquidity pressures given FCNR (B) redemption, spectrum auction and advance tax outflows, apprehension about the divergence in the monetary policy across regions and overvaluation in rupee as indicated by the REER index will continue to put pressure on rupee going forward. D&B expects the rupee to trade in the range of around 66.80-67.00 per US$ during Sep-16.
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Detailed Commentary
“While significant moderation in CPI inflation and decline in Index of Industrial Production has raised the market optimism for a policy rate cut, future policy rates would be contingent on the clarity over the course of inflation over the next few months, liquidity pressures arising primarily from FCNR (B) redemptions, spectrum auction and advance tax payments and the probability of the Fed rate cut by Dec 16. On the other hand, increased volatility in IIP raises the serious concerns to the sustainable recovery. While government capital expenditure has gone up, low private investment owing to excess capacity and low utilisation rate along with highly leveraged balance sheet is likely to keep upturn in investment activity subdued in the short term” said Dr. Arun Singh Lead Economist Dun & Bradstreet India. “However, expected improvement in rural income and consumption given normal monsoon and likely demand for consumer goods given 7th pay commission award which was doled out just before the festive season is likely to provide support to growth and investment cycle in the medium-term” he added.
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