D&B Economy Observer-December

Building up of upside risks to retail inflation is likely to break the impasse in the policy rate cycle
 
Key Economic Forecast
 
Real Economy: The base effect is expected to drive IIP growth number for the month of Nov-17. The industrial segment, however, remains weak owing to lack of buoyant demand and subdued investment activity. A sustained rise in the capital goods, improvement in the core infrastructure sector and a turnaround in the consumer durables segment is warranted for any meaningful recovery in the industrial activity. D&B expects Index of Industrial Production (IIP) to have grown by 4.0%-4.5% during Nov-17 
 
Price Scenario: While the reduced GST rates on several retail goods and services will translate into lower prices for those products and get reflected in the CPI/WPI commodity basket going forward, inflation is expected to inch upwards in the near term. Impact of Housing Rent Allowances (HRA) increases by the central and state governments, the turnaround in the global commodity prices along with elevated global crude oil prices, firming up of vegetable inflation and unseasonal rains during Dec 2017 are likely to keep inflation rate elevated. D&B expects the CPI inflation to be in the range of 5.4%-5.6% and WPI inflation to be in the range of 4.3% - 4.5% during Dec-17, respectively.
 
Money & Finance: Unwinding of balance sheets by the central banks in advanced countries, rising price pressures (domestically and globally), widening current account deficit in the domestic economy and fiscal slippages owing to revenue shortfall are likely to keep the bond yields elevated. Going ahead, the building up of upside risks to retail inflation is likely to break the impasse in the policy rate cycle. D&B expects 15-91 day T-Bill yield to average at around 6.1%-6.2% and 10-year G-sec yield at around 7.2%-7.3% during Dec-17.
 
External Sector: Since the beginning of 2017, the rupee has appreciated quite sharply against the dollar despite an unfavorable interest rate differential between the US Fed policy rate and the Repo rate. However, as per the real effective exchange rate, the rupee remains overvalued. Concerns of fiscal slippage at the central and state government levels, rising crude oil prices and increase in trade deficit will tend to exert downward pressure on rupee. D&B expects the rupee to trade in the range of around 64.2-64.4 per US$ during Dec-17.

 

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