Rupee Depreciation Pressure Raises Concerns Over Inflation, Current Account Gap And Profit Levels

Dun & Bradstreet’s Economy Observer is a monthly report that provides in-depth analysis on key macroeconomic developments in India and monthly forecast of key economic indicators.

Mumbai, August 30^th, 2022

Key economic forecast:

Real Economy: Industrial activity is likely to moderate towards the second half of FY23 due to the elevated input cost and rising borrowing costs, along with a slowdown in global economic activity. Protracted supply-chain disruption, aggravated geopolitical risks, weakening global growth and protectionist policies mean that risk to the momentum of export growth has now increased. Dun & Bradstreet expects the Index of Industrial Production (IIP) to have grown by 8.5% - 9.0% during July 2022.

Price Scenario: The softening of crude oil prices reduces upside risks to India's inflation. However, inflation is likely to remain elevated above the Reserve Bank of India’s (RBIs) upper threshold limit of 6.0% for most of the year. Pressures on supply chains persist, including the Russia-Ukraine war and shutdowns in China over Covid-19 cases. Geopolitical risk also prevails due to the Russia-Ukraine conflict, creating energy shortages in Europe. Depreciation pressures on the rupee will also prevail given the global monetary policy tightening and India’s high trade deficit. Dun & Bradstreet expects Consumer Price Inflation (CPI) to be in the range of 6.9% - 7.1% and Wholesale Price Inflation (WPI) to be around 13.0% - 13.3% in August 2022.

Money & Finance: With more policy rate hikes expected and outflows in the debt market, bond yields are expected to remain elevated. Inflationary pressures are broad-based and core inflation remains at elevated levels. The falling oil prices and US treasury yields could help the yield of the 10-year bond to moderate. Dun & Bradstreet therefore expects the 15-91-day Treasury Bills yield to average at around 5.4% - 5.5% and 10-year G-Sec yield at around 7.4% - 7.6% during August 2022.

External Sector: The strength of dollar, likelihood of further US FED rate hikes, although at a slower pace, and other geopolitical factors are likely to push the rupee lower against the US dollar. High trade deficit along with the moderation in growth will continue to exert downward pressures on the rupee. Dun & Bradstreet expects the rupee to be at around 79.7 per US$ during August 2022.

Dr. Arun Singh, Global Chief Economist, Dun & Bradstreet said, “Rupee depreciation pressure raises concerns over inflation, a widening trade deficit and profit levels. The risk to export growth momentum due to the slowdown in the global economy also adds to the concerns about widening of the trade deficit, which remains at record high levels. Given that further rate hikes are anticipated during the year, borrowing costs will continue to rise. Rising borrowing costs along with already elevated input cost will further add to the margin pressures of corporates. Dun & Bradstreet India’s Survey of Businesses for manufacturing and services sectors shows that optimism level of businesses in Q3 2022 for net pro?ts are the lowest in eight quarters.