ECONOMY FORECAST

GVA in Q4FY17 to remain subdued at 6.6% (y/y)

Key Economic Forecast

Real Economy: Weak investment activity as reflected in the subdued capital goods and infrastructure/construction sector output growth is likely to restrain growth. While the record food grain production in FY17 might alleviate some of the distress in the rural segment, demand in this segment continues to remain subdued. Normal monsoon for the year would provide the requisite boost to demand, the clarity for which would be obtained in the month June 2017. The transition to GST is also likely to create some disruption and impact the short-term sales volume across businesses. D&B expects the Index of Industrial Production (IIP) to remain weak and grow by only 3.0% - 3.5% during Apr-17.

Price Scenario: The excess liquidity in the banking system along with elevated global commodity prices and increase in house rent allowance under the 7th Pay Commission would continue to provide upward pressure to prices and could well be reflected in the headline numbers as the base effect wanes out post July 2017. The base effect along with deflation in the vegetables and pulses section and appreciation in rupee would keep the inflation rate lower in the near term. D&B expects the CPI inflation to be in the range of 2.3% - 2.5% and WPI inflation to be in the range of 3.7% - 3.9% during May-17, respectively.

Money & Finance: Expectation of moderate inflation in the near term is likely to keep the long term yields lower while the short term yields are likely to remain at same level, despite surplus liquidity in the banking system as investors expect US treasury yields to harden in the coming months. D&B expects 15-91 day T-Bill yield to average at around 6.0% - 6.2% and 10-year G-sec yield at around 6.9% - 7.1% during May-17.

External Sector: While rupee continues to remain overvalued, both FII and FDI inflows is expected to keep rupee stable in the near term. Rupee nonetheless remains under pressure from concerns over protectionist policies by the US government, subsequent forecast of monsoon and any geo-political strains. D&B expects the rupee to trade in the range of around 64.1 - 64.3 per US$ during May-17.

Detailed Commentary

“With the revision in the base year in both the WPI and IIP series, the key indicators i.e. IIP, WPI, CPI and national accounts are