Key Economic Forecast

Real Economy: The positive impacts of monetary and fiscal stimulus are gradually panning out as are evident from growth in the overall industrial activity. However, the deficit in the monsoon in the recent period, which has potential to affect agricultural production as well as rural demand in future, could turn out to be a major impediment in the revival phase. D&B expects IIP to have grown by 3.5%-4.5% during Jul-09.

Price Scenario: Given that the food articles inflation is showing no signs of tapering and the base effect which was generating negative inflation is expected to completely wear off soon, the headline inflation is expected to turn positive after that. In fact, it is expected to touch 5.8% by the end of the current fiscal owing to waning base effect of the last year, increasing commodity prices, rise in food grain prices caused by delayed monsoon and expansionary fiscal policy. D&B expects the WPI inflation to average between (-)1.3%-(-)1.1% during Aug-09.

Money & Finance: The RBI's decision to maintain a status quo in terms of policy rates, during the first quarter monetary policy review, is indicative of the end of monetary easing cycle that began in Oct-08. With the gradual building of potential inflationary pressures in the economy, the RBI is likely to reverse its accommodative policy stance and prepare for draining off the excess liquidity in the system. Given the huge government borrowing on one hand and comfortable liquidity conditions on the other the G-sec yield is expected to move in a narrow range. D&B therefore expects 15-91 day T-Bills yields to average at around 3.9%-4.2% and ten-year G-sec yield to average around 7.2%-7.4% during Aug-09.

External Sector: The rupee displayed a bearish movement towards the end of Jul-09 on account of losses in the domestic stock market and strengthening of the US Dollar against major global currencies. The rupee is expected to appreciate marginally from the current level during Aug-09 as foreign fund inflows are likely to resume. The rupee is expected to remain at around 48.10-48.40 per US$ during Aug-09.

Detailed Commentary

A number of indicators such as industrial production, direct tax collection, auto sales, railway revenues, as well business sentiment have witnessed gradual improvement in the past couple of months, supporting our initial view that the Indian economy would begin to witness revival by H2 FY10. Furthermore, positive growth in overall industrial production in last few months augurs well for the domestic economy. The resilient performance of the consumer durables and intermediate goods sector since the beginning of the current fiscal does point towards improving domestic demand conditions. The positive impact of fiscal and monetary stimulus packages is panning out giving support to the overall industrial production. Further, higher government spending especially on the infrastructure sector is likely to have supported the basic and capital goods industries to a certain extent.

“While the gradual improvement in IIP growth figures calls for some optimism, deficiency in monsoon, spiraling food article inflation, muted exports continue to pose significant downside risks to growth”, stated Mr. Kaushal Sampat, COO, Dun & Bradstreet India. Mr Sampat further stated, “The deficit in rainfall has a potential to affect agricultural production severely. Furthermore, the drought-like situation could not only translate into lower rural demand, which has shown some signs of improvement in the recent past, but would also exert upward pressure on food grain prices. This, in turn, could have a bearing on industrial production going forward. As the potential inflationary pressures begin to mount, maintaining a proper balance between inflationary expectations and growth would be a crucial task for Government and the RBI.”