Festive Demand and Robust Liquidity to Sustain India’s Growth Prospects

Mumbai, October 29, 2024: Dun & Bradstreet, a global leader in business decisioning data and analytics, has released its Economy Observer report for October 2024. Economy Observer is a monthly report that shares an in-depth analysis on key macroeconomic developments in India and provides a monthly forecast of key economic indicators, providing insight into the expected direction of the Indian economy. 

Key economic forecast:

Real Economy: The Index of Industrial Production (IIP) contracted by 0.14% y/y in August 2024, following growth of 4.7% y/y in July 2024. The mining sector continued its sluggish performance with a sharp contraction of 4.3%, mainly due to monsoon-related seasonality. The electricity sector also witnessed decline, while the manufacturing sector posted a marginal improvement, growing by 1% y/y. Use-based indices reflect weakness, with primary goods and consumer non-durables registering negative growth, and moderation in growth of capital goods and construction/infrastructure sectors. Nonetheless, Dun & Bradstreet expects industrial production to rebound, with IIP growth projected at 4.0% in September 2024. The revival in industrial performance is to be driven by festive demand and growing appetite for capital investment.

Price Scenario: Consumer price inflation surged to a nine-month high of 5.49% in September 2024, whereas wholesale price inflation picked up to 1.84% y/y. The incessant rise of food prices in September, soaring by more than 9%, has been responsible for the rise in both WPI and CPI. In addition, primary articles accelerated by 7%. Dun & Bradstreet expects wholesale inflation to settle at 2.0%, while retail inflation is forecasted to remain above the central bank’s target at 5.3% in October 2024. Food and beverages, which comprises 45.9% of the total CPI, is a major concern due to the erratic monsoon patterns. Moreover, India’s dependence on crude oil amid escalating geopolitical tensions necessitates caution regarding the near-term inflation outlook.

Money & Finance: The softening of short-term yields signals stability in India’s financial markets, reinforcing sufficient liquidity and a smooth growth trajectory. This is further supported by the early redemption of 10-year government bonds, infusing further liquidity in the economy. Dun & Bradstreet expects the yield on 15-91 days Treasury Bills to remain stable at 6.6%, while the 10-year G-Sec yield is projected to hover around 6.8% in October 2024. While long-term yields have seen slight fluctuations due to inflationary pressures, the prospect of rate cuts has diminished. The monetary policy actions in developed markets and uncertain geopolitical events would continue influencing the yield trajectory. Dun & Bradstreet anticipates credit growth to moderate further to 12% in October 2024, as the Reserve Bank of India (RBI) maintains a stricter policy stance to preserve asset quality.

External Sector: India's external sector is facing newer challenges, with Foreign Portfolio Investment (FPI) inflows tapering off and exports continuing to struggle against build-up in import demands. The monetary stimulus offered by developed markets to support their sluggish growth, combined with looser monetary policies, has caused the recent FPI outflows. This, in turn, has weakened the Indian Rupee (INR) against the US dollar (USD). Dun & Bradstreet forecasts the INR to depreciate further, reaching INR84.1: USD1 by November 2024. Geopolitical tensions, supply chain disruptions and capital market vulnerabilities are expected to keep the currency under pressure in the near term. However, India's strong appeal as an investment destination remains intact, supported by a favourable investment profile and near-record-high foreign exchange reserves, which provide substantial import cover.

Dr. Arun Singh, Global Chief Economist, Dun & Bradstreet said, "India's economic outlook shows a mix of resilience and caution. Industrial production fell in August, but a recovery is expected with seasonal changes and increased demand due to festivity. The financial sector remains stable, supported by strong credit and liquidity. However, high food prices and supply issues are keeping inflation above the Reserve Bank's target, limiting rate cuts. The rupee faces pressure from foreign investment outflows and a strong US dollar, along with geopolitical uncertainties. Despite these challenges, India’s large foreign exchange reserves provide a buffer against external shocks. Overall, the outlook emphasizes domestic strengths while advocating for caution."