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By Dr. Arun Singh,
Chief Economist
Dun & Bradstreet India

Economy Observer - Dec 2021

Gripped by the 2nd wave, India faces strong headwinds to growth – Dun & Bradstreet 

Real Economy: Dun & Bradstreet expects industrial activity to have improved in March 2021 as compared to February 2021 as economic activity had gathered pace by then. The all-time high Goods and Services Tax (GST) collections in March 2021 indicated the uptick in consumer demand and higher transactions conducted by businesses. The rise in demand for passenger vehicles and two wheelers along with increase in prices also reflected the recovery in the consumer demand. Improving global growth prospects have similarly led to buoyancy in the industrial activity through high export demand. Driven by the increase in economic activity, Dun & Bradstreet expects the Index of Industrial Production (IIP) to have grown by 10.0% - 12.0% during March 2021. This is also due to the low base effect. However, we expect the scenario to change from April 2021 onwards, as countries globally and India in particular, grapples to deal with the onslaught of the 2nd wave and the resultant restrictions.

Price Scenario: Dun & Bradstreet expects wholesale inflation to remain elevated and inch higher in April 2021 from the March 2021 levels largely due to the low base effect. The restriction on people movement is expected to generate hoarding tendencies and fuel inflationary pressures. The uncertainty posed by the rapid rise in cases will lead to an increase in the cost of various services including logistics. Supply side pressures to inflation will emanate from the quantitative easing as the Reserve Bank of India (RBI) will buy one trillion rupees of government bond in the first quarter of FY22, the elevated international commodity prices and the localized lockdowns. The expected depreciation in rupee is also likely to feed into inflation. However, better agricultural output and lower demand for non-essential and recreational services in the coming months should offset some of the price pressures. Dun & Bradstreet expects Consumer Price Inflation (CPI) to be in the range of 4.1% - 4.3% and Wholesale Price Inflation (WPI) to be in the range of 9.3 - 9.5% during April 2021.

Money & Finance: Dun & Bradstreet expects long term bond yields to moderate from the March 2021 levels and remain range bound in April 2021 as the RBI will buy government bonds worth one trillion rupees in the three months up to June 2021 under the G-sec acquisition programme or G-SAP 1.0. This will offset the upward pressures to long term yields from high inflation, government borrowing and the rise in US 10-year treasury yields. While the open market purchases by the RBI is likely to support the long end of the curve, the RBI’s decision to increase the tenure of variable rate reverse repo auction operations is expected to put some pressure on the short-term yields. Dun & Bradstreet expects the 15-91day Treasury Bills yield to average at around 3.2%-3.3% and 10-year G-Sec yield at around 6.18%-6.20% during April 2021.

External Sector: Dun & Bradstreet expects rupee to depreciate from the levels witnessed in March 2021. The RBI’s decision to infuse one trillion rupees in the market to buy government bonds during the quarter ending June 2021 is likely to exert significant downward pressure on rupee. The elevated global commodity prices and expected rise in US bond yields will add to the rupee depreciation pressures. Dun & Bradstreet expects the rupee to remain at around 74.5-74.8 per US$ during April 2021.

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