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D&B Economy Observer: Economy forecast for the month of January

How the government balances its growth strategy and finances in the Budget would be keenly watched

Real Economy: Even though Index of Industrial Production (IIP) has turned positive in Nov 19, as estimated by us last month, it is likely to remain subdued. Slowdown in consumption and investment along with high inflationary pressures, geopolitical issues and uncertainty over the recovery of the economic growth are likely to keep IIP subdued. D&B expects Index of Industrial Production (IIP) to have remain subdued by 1.5% - 2.0% during Dec 2019.

Price Scenario: Uneven rainfall along with floods in many states and geopolitical issues has led to surge in headline inflation even as demand remains muted. Even as the surge in inflation in vegetables is expected to soften, increase in inflation in the fuel group, pulses and protein and hike in telecom tariffs is likely to prevent inflation from falling considerably. Policy rate is thus likely to remain unchanged during the year, however monetary policy stance might change from accommodative to neutral. D&B expects the CPI inflation to remain in the range of 8.0%-8.2% and WPI inflation in the range of 3.3% - 3.5% during Jan 2020, respectively.

Money & Finance: Surge in inflation, expectation of widening of fiscal deficit, slowing growth and expectations that policy interest rate is likely to remain unchanged are expected to keep the yields elevated in the bond market. Moreover, FII outflows in the debt market is expected to exert upward pressure on yields. D&B expects 15-91-day T-Bill yield to average at around 4.9%-5.0% and 10-year G-sec yield at around 6.7%-6.8% during Jan 2020.

External Sector: Rupee is expected to remain weak over geopolitical issues leading to surge in oil prices, conflicts over the US China trade deal, FII outflows, expectation of fiscal slippage by a wider margin, inflationary pressures and slowing growth. D&B expects the rupee to remain at around 71.1-71.3 per US$ during Jan-2020.

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