Phase of revival in growth might have started building roots

Real Economy: The base effect is expected to drive IIP growth number unless the production level suffers a setback in the month of Oct -17. Overall industrial scenario, however, remains weak owing to lack of buoyant demand and subdued investment activity given lower capacity utilisation rate. D&B expects Index of Industrial Production (IIP) to grow by 3.0%-3.2% during Oct-17.

 

Price Scenario: Inflation is likely to remain elevated driven by rise in crude oil and industrial metal prices globally and hence imported inflation. The base effect is also likely to impart an upward bias. A weaker rupee is likely to feed in to inflation at a time when oil prices are on a rise. Thus, inflation is expected to be higher in the second half of the fiscal year owing to unfavourable base effect, upturn in the global crude oil and food prices, increase in house rent allowance and the recent hike in pay scales to teachers. D&B expects the CPI inflation to be in the range of 4.2%-4.4% and WPI inflation to be in the range of 3.6% - 3.7% during Nov-17, respectively.

 

Money & Finance: The RBI's stance on policy rates is likely to be neutral in the upcoming policy review as the inflation rate, both WPI and CPI inches upward. The rise in inflation along with possible fiscal slippage is expected to keep the yields in the long term bonds higher. The increased probability of a hike in interest rates by the US Federal Reserve in December will tend to keep upward pressure to the bond yields. D&B expects 15-91 day T-Bill yield to average at around 6.0%-6.1% and 10-year G-sec yield at around 6.8%-7.0% during Nov-17.

 

External Sector: The rupee is expected to be on a depreciating note because of rising current account deficit and muted FPI equity inflows. High expectations of FED rate hike which would keep inflows lower than the high levels witnessed in the recent past along with increase in trade deficit as imports surge largely on the back of increased global commodity prices will continue to exert pressure on the value of rupee.

D&B expects the rupee to trade in the range of around 65.1-65.3 per US$ during Nov-17.

 

Detailed Commentary:

 

“A sovereign rating upgrade after more than a decade, high jump in the Ease of Doing Business rankings and improvement in ranking in other indices indicates that the structural reforms taken by the government has been acknowledged globally. Further, government's intent to modify GST rate and structure coupled with ensuring businesses pass on the benefits of GST to consumers just four months after introduction of tax reform asserts that the government is committed to bring India's growth story on track. Also, reforms pertaining to PSU banks is another positive step. Expectations are thus high and thereby the optimism that once the measures start yielding results it will accelerate the growth levels. However, the pace of implementation and the continuation of the measures would determine the way it translates into real growth. The list of initiatives would only have to be increased unless any tangible impact in the form of acceleration in private investment or strengthening of consumption is visible. Nonetheless, any structural reform is usually accompanied by some disruption and thus the prolonged impact of GST, which closely followed the demonetisation drive, should not be undermined” said Dr. Arun Singh, Lead Economist Dun & Bradstreet India. “In a scenario where private investment remains weak and the government has to step up its contribution despite a not so strong fiscal position and high debt levels, any issues related to government's earnings would not be easy to cope up with”, he added.