Balance sheets of external sector and banks need greater focus of the government

Balance sheets of external sector and banks need greater focus of the government

Real Economy: Rise in input prices and perception of weakening of external demand weigh on industrial production. However, private consumption should revive strongly on the back of dissipating impact of demonetization, GST and the government spending before the elections. D&B expects Index of Industrial Production (IIP) to grow by 5.0%-5.5% during Jun-18.

Price Scenario:   A weak rupee, widening of trade deficit, expected spending by the government ahead of the general election due next year, domestic household inflation expectations and input cost pressures pose upward risk to inflation base effect is likely to play critical role till Nov 18. While overall price index will continue to rise, the inflation rate will remain given the statistical base effect. D&B expects the CPI inflation to be in the range of 4.6%-4.8% and WPI inflation to be in the range of 5.5% - 5.7% during Jul 18, respectively.

Money & Finance: Hardening of inflationary pressures,strong FII outflows in the debt market amidst tighter global liquidity and investor cautiousness,worries of an all-out global trade war,a stronger dollar and concerns that the government may not be able to stick to its fiscal deficit target owing to rise in global crude oil prices and election related spending are expected to keep the yields across the curve elevated. Moreover, another rate hike is due if oil prices remain elevated and if external pressures in terms of FII outflows and weak rupee prevails.D&B expects 15-91-day T-Bill yield to average at around 6.2%-6.4%and 10-year G-sec yield at around 7.9%-8.1%during Jul-18.

External Sector: Since the beginning of 2017, the rupee has appreciated quite sharply against the dollar despite an unfavorable interest rate differential between the US Fed policy rate and the Repo rate. However, as per the real effective exchange rate, the rupee remains overvalued. Concerns of fiscal slippage at the central and state government levels, rising crude oil prices and increase in trade deficit will tend to exert downward pressure on rupee. D&B expects the rupee to trade in the range of around 64.2-64.4 per US$ during Dec-17.