El Nino and heatwaves could be a risk to demand from the rural sector

Mumbai, May 2, 2023

Key economic forecast:

Real Economy: Dun & Bradstreet India expects the Index of Industrial Production (IIP) to have expanded steadily in March 2023. Resilient demand, easing inflationary pressures and government capex are tailwinds for industrial output. However, high interest rates, weak external demand, impact of the heatwave and El Nino on rural demand pose risks to industrial activity. Dun & Bradstreet expects the Index of Industrial Production to have grown by (4.5%) - (5.0%), partly due to base effect, during March 2023.

Price Scenario: Easing of supply chain pressures and commodity price declines suggest that India's retail and wholesale inflation print will remain low.  However, the impact of the heatwave and El Nino also pose a potential risk for the domestic crop output and could keep food inflation elevated. Despite the recent corrections in global crude oil and commodities prices, their future trajectories are still unpredictable due to ongoing geopolitical tensions and potential demand recovery from nations. Dun & Bradstreet expects the Consumer Price Inflation (CPI) to be in the range of 4.4% - 4.9% and Wholesale Price Inflation (WPI) to be around 0.1% - 0.3%, respectively in April 2023.

Money & Finance: US bond yields are anticipated to decrease as a new set of economic reports indicated a potential worse-than-expected economic slowdown in the US. This, together with the Reserve Bank of India's decision to hold off on raising interest rates, is expected to prevent yields from moving out of their current range, and from increasing further compared to the previous month. Dun & Bradstreet expects the 15-91-day Treasury Bills yield to remain at around 6.9% and 10-year G-Sec yield to be 7.3% for April 2023.

External Sector: Dun & Bradstreet anticipates that the currency will strengthen in April 2023 following its appreciation in March 2023. The rupee is anticipated to be supported by the return of FII inflows, a reduction in the current account deficit, an increase in foreign exchange reserves, along with the moderation in inflation to help rupee to appreciate, albeit slightly. Dun & Bradstreet expects the rupee to appreciate to 82.1 per US$ during April 2023.

Dr. Arun Singh, Global Chief Economist, Dun & Bradstreet said, “The new stimulus to growth from demand side is expected to remain weak, as the support from the pent-up domestic demand is likely to wane. Along with that, lack of any meaningful recovery from India's biggest trading partners would weigh upon the Indian economy. This is not meant to undermine the resilience in the external sector as seen by the continued improvement of vulnerability indicators including the ratio of external debt to GDP, the ratio of short-term debt (residual maturity) to reserves, and the debt service ratio. What needs to be monitored closely is the occurrence of heatwave and El Nino as it can pose a potential risk for the crop output which could then affect business demand from the rural market. India’s harvest is a risk not only for the domestic market but also holds implications for the global food security”.