Key Economic Forecast

Real Economy: Although D&B expected some improvement in the IIP growth, a double digit growth in the industrial production for the month of Aug-09 came as a pleasant surprise. The impressive growth in industrial output during Aug-09, increase in direct tax collections and improving business sentiment indicate that the process of economic recovery has set in. Nonetheless, there exist certain downside risks to the economic recovery such as lower agriculture growth and mounting inflationary pressures. D&B expects IIP to have grown by 7.0%-8.0% during Sep-09. 

Price Scenario: The WPI inflation entered into the positive territory during the first week of Sep-09 driven by the high prices of agricultural commodities. Given the high prices of pri­mary food articles, waning base effect and an expected decline in agriculture production, the WPI inflation might surge to around 6 % by the end of the current fiscal. D&B expects the WPI inflation to average between 1.3%-1.5% during Sep-09.

Money & Finance: While D&B does not expect any increase in the repo and reverse repo rates in the near future, it expects that the RBI would increase the CRR to absorb the excess liquidity in the system and contain any demand side pressures on the inflation front. In the G-sec market, RBI's stance on hiking the held to maturity (HTM) category of securities and the timing of reversal of accommodative monetary policy is likely to play crucial role in determining the movement of G-sec yields in the short run. D&B expects 15-91 day T-Bill yield to average at around 3.0%-3.2% and ten-year G-sec yield to average at around 7.4%-7.7% during Oct-09.

External Sector: The turnaround in the capital account balance has revealed the confidence of the foreign investors in India's growth prospects. On the current account front, while higher inward remittances from Indians working overseas provided some support, the declining trend in the earnings for software services is an area of concern. In the forex market, rupee has witnessed a steep appreciation since Aug 09 mainly due to weakening of the US dollar and massive foreign capital inflows. While D&B expected the rupee to appreciate, the current increase in value of the rupee is more than our expectation. D&B expects the rupee to remain at around 46.30-46.60 per US$ during Oct-09.

Detailed Commentary

A confluence of factors such as, sustained improvement in IIP, increase in direct tax collections, improving business sentiment etc, indicate that the process of economic recovery has set in. Despite these developments, the pace of economic recovery is expected to be slow due to the emergence of certain downside risks such as a potentially lower agriculture growth & surging primary food articles inflation.

“The current rebound in industrial activity can be attributed to the fiscal stimulus measures, as well as RBI's accommodative monetary policy, and of course, restocking following the earlier cutbacks in factory output & drawdown of inventories as demand starts to improve”, stated Mr. Kaushal Sampat, COO, Dun & Bradstreet India. Mr Sampat further stated, “A sustained growth in industrial production will primarily be driven by the consistently improving business sentiment and recuperating demand conditions. Given the emergence of certain downside risks to growth and the limited scope for further fiscal stimulus, the timing of 'exit' strategies in terms of accommodative monetary policy becomes even more critical. D&B expects that while RBI might consider increasing the CRR for draining of excess liquidity from the system anytime till the end of the current fiscal, it may maintain a status quo in terms of other policy interest rates. However, these changes to CRR are unlikely to happen in the policy review of Oct 09.”