Concerns to revival in growth rears its head
Key Economic Forecast
Real Economy: The momentum in industrial production is likely to remain subdued given the subdued demand and weak investment growth. Distribution of monsoon remains uneven which might impact rural demand to an extent. While implementation of GST will help businesses in the mid term to long-term, the transition to GST is likely to create some disruption and impact the immediate sales volume across businesses. D&B expects Index of Industrial Production (IIP) to remain weak and grow by only 2.2%-2.4% during Jul-17 largely due to base effect.
Price Scenario: Spatial distribution of monsoon with deficit of rainfall across geographical locations and floods in some states poses risk for inflationary expectations which will have a bearing on the course of inflation in the near term. The excess liquidity in the banking system along with increase in house rent allowance under the 7th Pay Commission would continue to provide upward pressure to prices and could well be reflected in the headline numbers as the base effect wanes out post July 2017. D&B expects the CPI inflation to be in the range of 2.4%-2.6% and WPI inflation to be in the range of 2.0% - 2.2% during Aug-17, respectively.
Money & Finance: A prolonged pause in rate cut is on the anvil as upside pressures to inflation prevail. Foreign inflows in the domestic bond market have surged during the year. These factors along with cautiousness regarding the US Federal Reserve stance on future rate hike will continue to impact domestic market at least in the short term. D&B expects 15-91 day T-Bill yield to average at around 6.0%-6.1% and 10-year G-sec yield at around 6.5%-6.7% during Aug-17, respectively.
External Sector: Excess liquidity in the banking system post demonetisation, tepid credit growth and surge in dollar inflows in the debt and equity markets will continue to have upward pressure on the rupee going ahead. D&B expects the rupee to trade in the range of around 64.0-64.2 per US$ during Aug-17.
“Nine months after demonetisation and two months of GST implementation, concerns to growth dynamics do prevail led by subdued consumption and investment demand, compounded by twin balance sheet problem and strain on state finances due to farm loan waivers. In such a scenario, further monetary policy easing would have limited impact on investment as low demand along with excess capacity prevails. Moreover, transmission of the policy easing has not been effective as banks remain risk averse given deteriorating assets quality. Given the upside risks to inflation emanating from factors such as implementation of house rent allowance (7th Pay Commission), initial immediate impact of GST, hike in cooking gas prices, likely fiscal slippages due to farm loan waivers, the policy rate is not likely to be further reduced for an extended period. Unless the twin balance sheet problem is effectively resolved, the other policy measures taken to revive investment demand cannot be channelized effectively” said Dr. Arun Singh, Lead Economist Dun & Bradstreet India. “Policy makers must ensure that the measures taken to solve the problem in the banking sector do not impact the optimism level amongst companies. The strain in the fiscal balance posed by the unanticipated demand for farm loan waivers across states will have some bearing on the public investment going forward” he added.