High borrowing costs and rupee depreciation pressures to impact corporates
Real Economy: Weakening of major commodity prices,expectations of impact on trade owing to the tariff measures imposed by large economies,weak investment activity in domestic market,continued low bank credit to industries and the rise in lending rates,both domestically and globally is expected to impact the domestic industrial activity in the short term to mid term. D&B expects Index of Industrial Production (IIP) to have grown by 6.8% - 7.2% during Jul-18.
Price Scenario: While the overall price index will continue to rise,the base effect is likely to keep the inflation rate moderate till Nov 18. Currently,inflationary pressures in the economy emanate from elevated oil prices,imported inflation owing to rupee depreciation and election related spending. Core inflation remains high signaling rising input costs and improving demand. Floods in several states in India could also impart price pressures following loss of goods and disruptions in the supply chain. D&B expects the CPI inflation to be in the range of 3.7% - 3.9% and WPI inflation to be in the range of 4.8% - 5% during Aug-18,respectively.
Money & Finance: The repo rate hike by RBI,expectations for inflationary pressure,rupee depreciation,rise in US treasury yields,anticipated future rate hikes by the US Fed and a strong dollar amidst tighter global liquidity conditions are expected to keep the yields in the bond market elevated.Given the inflationary and rupee depreciation pressures,another rate hike by the RBI this year cannot be ruled out.D&B expects 15-91-day T-Bill yield to average at around 6.5%-6.7%and 10-year G-sec yield at around 7.7%-7.9%during Aug-18.
External Sector: Rupee is expected to remain under pressure in the short term to mid term. Strengthening of dollar,the geopolitical issues and the strains amongst countries related to trade measures would continue to impart depreciation pressures on rupee. On the other hand,the rupee remains undervalued as per the 6-currency trade based REER index. D&B expects the rupee to trade in the range of around 69.5 - 69.8 per US$ during Aug-18.