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D&B Economy Observer: Economy forecast for the month of December 2021

Abatement of the 2nd wave and strong push for vaccination has uplifted the business optimism and growth prospects of the economy - Dun & Bradstreet

Real Economy: Dun & Bradstreet expects growth in Index of Industrial production (IIP) to have picked up in the month of November 2021 partially owing to a low base and largely due to a pick-up in the economic activity. The rebound in demand is evident from the strong growth in revenue from tax collections. We believe that the traction in the construction sector in the upcoming months would add to the growth momentum of the IIP. Dun & Bradstreet expects the Index of Industrial Production (IIP) to have grown by 7.0% -7.5% during November 2021.

Price Scenario:High energy prices are increasing, feeding into core inflation. High and sticky core inflation indicates that manufacturers are increasingly passing on the higher input costs to their output prices.  Retail inflation is thus likely to inch towards the upper limit of the Central Bank inflation target range. Moreover, price pressures are visible in the services category. We expect services inflation to firm up as employment picks up. As demand for workers increase, wages will follow, especially in blue collar jobs. This is likely to lead to a wage price spiral putting further upward pressure on Consumer Price Inflation (CPI) inflation. Dun & Bradstreet expects Consumer Price Inflation (CPI) to be in the range of 5.9% - 6.1% and Wholesale Price Inflation (WPI) to be around 14.6% - 14.8% in December 2021.

Money & Finance: While Central Bank’s policy normalization measures will continue to keep yields on the short term bonds high, hike in interest rates by global central banks, increase in the pace of the taper of quantitative easing by the US Fed and hints that there might be three interest rate hikes in 2022 is pushing the yields on the 10-year benchmark higher. However, expectations of low government debt supply owing to buoyancy in revenues and Foreign Investment inflows in the debt market is likely to offset some of the upward pressures. Dun & Bradstreet thus, expects the 15-91-day Treasury Bills yield to average at around 3.55% -3.65% and 10-year G-Sec yield at around 6.4%-6.5% during December 2021.

External Sector: Dun & Bradstreet expects stock market volatility, hike in interest rates by global central banks and strengthening of dollar to keep rupee subdued. Supply chain shocks are fueling inflationary pressures and exerting downside pressure on the domestic currency. Indian rupee may not come out of the bears grip in short-term. The 3 month and 6 month forward premia increased in the month of October (m-o-m) after three months of decline indicating depreciation pressures on rupee. Dun & Bradstreet expects the rupee to depreciate to 76 per US$ during December 2021.

Commentary from Global Chief Economist at Dun & Bradstreet, Dr. Arun Singh

“As uncertainty over Omicron looms large, fading away of optimism levels or demand downturn could weigh upon growth. Besides, the risk from faster policy normalisation by major central banks leading to tightening of financial conditions and stifling of growth impulses has increased. India will not remain decoupled if global growth weakens. So far, India has managed to recover strongly.  Nonetheless, rising of inflationary pressures might dampen the confidence levels for spending and restrain the pace of revival in demand which is yet to recover to the pre-pandemic level. Dun & Bradstreet proprietary data shows that increase in energy prices has already started impacting the credit performance of energy intensive sectors with increased risk of business closures, especially in the unorganised sector. Given that inflation can be a drag on demand, investment should pick up largely driven by the government. In this context, the slew of infrastructure projects undertaken by the government, notably the Gati Shakti project, inland waterways, textile parks amongst others bodes well for India’s growth.” said Dr. Arun Singh, Global Chief Economist, Dun & Bradstreet.

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