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Price correction in food articles to materialize post October

Key Economic Forecast - Aug 2016

Real Economy:
A sustainable positive growth in the IIP data could only reflect that the industrial output is on it’s way to recovery. Protracted weakness in exports, subdued demand, coupled with low credit flows along with slow pickup in the investment activity are likely to keep the volume of output indicated by the Index of Industrial Production (IIP) muted. D&B expects IIP to have grown by
2.0%-2.5% during Jul-16.
Price Scenario:
The greater area covered under sowing of the Kharif crops, especially rice and pulses, enthuses optimism. However, inflation in the non-food segment and fuel group has been witnessing a steady rise. Upside risks to inflation still prevails from rising international commodity prices, particularly of crude oil and the implementation of the 7th Central Pay Commission awards. The dynamics of food inflation would be explicit once the Kharif crops are available in the market. D&B expects the WPI inflation to be in the range of 4.0%-4.2% and CPI inflation to be in the range of 6.1% - 6.3% during Aug-16, respectively.
Money & Finance:
While the FII inflows in the debt market and buying of bonds by the RBI through open market operations will lower the yields across the curve, the edging up of inflation will provide upward pressure to the yield curve. The 10-year yields are expected to remain marginally lower than the level in the previous month. D&B expects 15-91 day T-Bill yield to average at around 6.6%-6.8% and 10-year G-sec yield at around 7.1%-7.3% during Aug 16.
External Sector:
The Indian rupee is seen strengthening against the US dollar on account of weak economic data and lower expectations from the FED to hike the interest rate in the month of September 2016. Along with it an extended phase of easy monetary policy around the globe will also support the Indian rupee. The upcoming FCNR (B) redemption between September – November, could lead to some volatility in Indian rupee, but again as said by the RBI that they would continue to supply the dollar incase of any shortage. D&B expects the rupee to trade in the range of around 66.70-66.90 per US$ during Aug-16.


Detailed Commentary
“Achieving a target of 4% CPI inflation in the near term seems unlikely. The buildup of inflationary expectations owing to the 7th Pay Commission awards and the rearing up of the food along with non-food inflation would continue to keep inflationary expectations on the upside. While a greater area has been covered under sowing of the Kharif crops, the course of the inflation will be clear on the availability of the food crops in the market post the harvest period. The revival of the industrial output also depends on the resurgence of demand especially from the rural sector, which in turn, also depends on the prospects of the agriculture output. Even as the June IIP data shows some positive signs, a sustainable positive growth could only confirm the trend” said Dr. Arun Singh Lead Economist Dun & Bradstreet India. “Enhancing agriculture productivity could help in controlling food inflation. The model Agricultural Land Leasing Act, 2016, which seeks to permit owners to lease out agricultural land to tenant farmers, should be passed as it would enable consolidation of farm land, better mechanization and lead to land improvement by allowing tenant farmers access facilities like credit, thereby enhancing productivity in the agricultural sector”, he added.
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