D&B Economy Observer: Economy forecast for the month of February

Outlook remains clouded by the current underlying risks

Real Economy:The subdued domestic demand, weak global economic outlook and uncertainty amongst businesses over the outcome of the general elections prevail. Further, concerns about the government curtailing its investment given significant short fall in tax collections against target is expected to keep the industrial activity subdued in the near term. D&B expects Index of Industrial Production (IIP) to have moderated by 1.5%-2.0% during Dec-18.

Price Scenario: While the non-core inflation has touched the lower level of the RBI's target range, core inflation remains high and sticky. There are both upside and downside risks to inflation. The easing of prices of food can reverse post winter season. Going ahead, the election related spending, lower agriculture production and increase in MSP is likely to exert upward pressure on inflation. The uncertainty in international crude oil prices remain high. The input cost pressures are still high for firms and can result in cost pass-through to consumers. However, given the depressed prices of agricultural commodities and sluggish growth in rural wages, retail inflation in the rural sector is likely to remain subdued. In the near term, we expect inflation to remain restrained. D&B expects the CPI inflation to be in the range of 2.5%-2.7% and WPI inflation to be in the range of 3.9% - 4.0% during Jan 19, respectively.

Money & Finance: Concerns about fiscal slippage and reversal in oil price movement is expected to keep yields across the curve elevated. On the contrary, outflows in debt funds, RBI open purchase operations, softening of inflation and inflationary expectations and likely slowdown of growth during H2 FY19 will continue to exert downward pressure on bonds. D&B expects 15-91-day T-Bill yield to average at around 6.5%-6.7% and 10-year G-sec yield at around 7.35%-7.50% during Jan-19.

External Sector: Likely pause in the FED rate hike is expected to support rupee. On the contrary, concerns over widening of trade deficit, rise in global crude oil prices, and uncertainty over the general election outcome is expected to exert depreciation pressures on rupee in the near term. D&B expects the rupee to depreciate to around 70.6-70.8 per US$ during Jan-19.