Upside risks to inflation persists
Key Economic Forecast – April 2017

Real Economy: Revival in demand, especially in the rural segment, which in turn depends on how the monsoon pans out this year with forecasts of probability of occurrence of El Nino, may impact inflationary expectations and determine the turnaround in the industrial activity. Weak consumer demand along with failure in strong pickup in investment activity poses challenges to the revival in industrial activity going ahead. Moreover, while the impact of demonetization is yet to alleviate, the industry transition to GST model is expected to impact the short-term sales volume across different segments. D&B expects Index of Industrial Production (IIP) to remain weak in the short term to mid-term and might have grown by only 0.5%-1.0% during Mar-17.

Price Scenario: The rise in global commodity prices, possibility of an occurrence of El Nino, increase in house rent allowance under the 7th Pay Commission, the initial impact on prices owing to GST would add to the upside risk to inflation besides the problem of excess liquidity in the banking system. Core inflation has remained sticky for a protracted period despite weak demand. D&B expects the CPI inflation to be in the range of 3.5%-3.7% and WPI inflation to be in the range of 5.4% - 5.6% during Apr-17, respectively, slightly moderate than the previous month owing to base effect.

Money & Finance: While narrowing of the LAF corridor to +/-25bps by the RBI would anchor the money market rates in a tighter band and help in mopping up excess liquidity, the difference in the rate of mobilization of deposits compared to credit disbursement, the extent of government spending in the new fiscal year and appreciation in rupee could impact liquidity in the system. D&B expects 15-91 day T-Bill yield to average at around 5.5%-5.7% and 10-year G-sec yield at around 6.9%-7.1% during Apr-17.

External Sector: While both domestic and global cues have aided in strong FII inflows and consequent appreciation in rupee, the concerns over protectionist policies by the US government, subsequent forecast of monsoon, the fourth quarterly results of the corporates and any geo-political strains could impact the rupee movement. D&B expects the rupee to trade in the range of around 64.5-64.6 per US$ during Apr-17.

D&B's Economy Observer

A monthly economy outlook

The D&B Economy Observer is a macroeconomic newsletter which covers an in-depth analysis on important macroeconomic developments in the Indian economy and outlook on various variables such as GDP, inflation, Index of Industrial Production (IIP), G-sec yields, bank credit and exchange rate. The newsletter helps businesses to track the economic environment on an ongoing basis. This monthly newsletter includes: 1) Indian macroeconomic update 2) Forecasts for key macro-economic variables and 3) Special article on contemporary and emerging national issues

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