Risks remain heightened in the near term
Real Economy:Weak exports, rural distress, credit constraints and uncertainty over the election outcome would continue to drag down industrial production in the near to medium term. D&B expects Index of Industrial Production (IIP) to have grown by 3.0%-3.2% during Feb-19.
Price Scenario: Reversal in food prices that have remained unusually low are likely to push up inflation. Prices of some commodities such as cereals vary widely under WPI and CPI. The election related spending and expected lower Khariff crop output would exert additional inflationary pressures. However, demand push inflationary pressures remain benign restraining the pace of increase in inflation. D&B expects the CPI inflation to be in the range of 2.6%-2.8% and WPI inflation to be in the range of 3.0% - 3.2% during Mar 19, respectively.
Money & Finance: The RBI's measures to enhance liquidity and stable FII inflows are likely to support the bond market notwithstanding the pressures from the likely slippage in the fiscal deficit by a wider margin than expected. The RBI decision to inject liquidity through the US$ 5 billion currency swap for a tenor of 3 years on March 26, 2019, is expected to support credit growth and soften bond yields. However, it has created apprehensions over the possibility of reduction in the size of RBI's OMO operations from the next fiscal year. Bond yields are thus likely to remain range bound. D&B expects 15-91-day T-Bill yield to average at around 6.3%-6.4% and 10-year G-sec yield at around 7.3%-7.4% during Mar-19.
External Sector: The RBI’s decision to inject rupee liquidity and buy dollar through the swap auction will exert depreciation pressures on rupee in the near term. On the other hand, the dollar inflows in the Indian market and weakening of value of dollar will lead to rupee appreciation. D&B expects the rupee to appreciate marginally to around 69.6-69.8 per US$ during Mar-19 compared to Feb-19.