Economy Observer for June 2017

Price of goods and services likely to be volatile as GST sets in

Key Economic Forecast

Real Economy: Capital and consumer durables goods continue to be a major drag on the Index of Industrial Production (IIP) data. Moreover, the transition to GST is likely to create some disruption and impact the short-term sales volume across businesses as businesses also readjust their inventory and supply chain. While monsoon has been predicted to be normal, the spatial distribution of the rainfall along with the revival in demand in the rural segment will be crucial for the growth of the industrial sector in the months ahead. D&B expects IIP to have grown by 1.3%-1.5% during May-17 largely due to the base effect.

Price Scenario: The base effect along with deflation in some of the primary articles and appreciation in rupee would keep the inflation rate lower in the near term. However, thrust to demand from the remonetisation measures, disbursement of the allowance under the 7th Pay Commission, increase in MSP in pulses, oil seeds and cotton, expectations of normal monsoon and implement of GST would continue to provide upward pressure to prices. D&B expects the CPI inflation to be in the range of 1.3%-1.5% and WPI inflation to be in the range of 1.3% - 1.5% during Jun-17, respectively – largely due to base effect.

Money & Finance: Lower inflation, expectations of rate cut in market, surplus liquidity in the banking system along with FII inflows in the debt market is expected to keep the yields across the curve lower. Further, given rising risk aversion amongst bankers, low capacity utilization rate and weak demand are expected to keep bank credit lower. D&B expects 15-91 day T-Bill yield to average at around 6.1%-6.3% and 10- year G-sec yield at around 7.0%-7.2% during Jun-17, almost in the same level as in the previous month.

External Sector: Lower inflation, strong FII inflows, narrowing down of current account deficit and prevalence of optimism amongst investors will result in an appreciating bias for the rupee in the short term at least. However, rupee remains overvalued. Overvaluation of rupee, concerns over protectionist policies by the US government, pace and quantum of foreign fund inflows post the Fed rate hike, and any geopolitical strains will continue to exert downward pressure on rupee. D&B expects the rupee to be in the range of around 64.4-64.6 per US$ during Jun-17.

 

Detailed Commentary

“While there are increased expectations in the market for a policy rate cut due to moderation in the both WPI and CPI inflation along
with weak industrial production and GVA growth rate, the future policy stance will be contingent on the pace of increase in demand in the economy, impact of geo-political events that would create uncertainty in the global commodity prices, impact of increase in recent MSP in pulses, oil seeds and cotton, announcement of farm loan waivers that has increased the risk of fiscal slippages,
implementations of 7th Pay commission awards and any policy announcement by US federal authority that will impact capital inflows. However, since price of goods and services are likely to be volatile as GST sets in and the base effect of the headline inflation numbers wanes out post July 2017, we expect the policy rates to remain unaltered in the near term. Further, despite the record agriculture output during FY17, the revival in rural demand is yet to be witnessed” said Dr. Arun Singh, Lead Economist Dun & Bradstreet India. He also added “The recent decision to link the retail prices of petrol and diesel to the international market prices on a daily basis is a welcome move, however, it remains to be seen to what extent this lends to the volatility in the inflation rate and is
beneficial for the end consumers as India is a major oil importing country and one of the largest consumers of oil”.

 

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