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D&B Economy Observer- October

Recovery depends on the future initiatives by the government

Key Economic Forecast
Real Economy: IIP is expected to continue to register a higher growth rate in Sept 17 like Aug 17 as restocking in the manufacturing sector starts, festivity related demand seeps in and base effect wanes off. Overall industrial scenario, however, remains weak owing to lack of buoyant demand and subdued investment activity. D&B expects Index of Industrial Production (IIP) to grow by 4.0%-4.2% during Sep 17.
Price Scenario: The recent reduction in prices of petrol and diesel is expected to bring down WPI inflation by 0.2% in Oct 17, assuming everything else to be constant, while the indirect impact would be through reduced freight rates over a period of time. Nonetheless, upside pressure to overall inflation prevails from spatial distribution of monsoon, excess liquidity in the banking system along with increase in house rent allowance under the 7th Pay Commission. D&B expects the CPI inflation to be in the range of 3.3%-3.5% and WPI inflation to be in the range of 2.7% - 2.9% during Oct 17, respectively.
Money & Finance: A pause in the policy rate cut along with outflow pressures given the start of the US Fed's unwinding of its balance sheet and possibility of a Fed rate hike in the near future is likely keep yields across maturities at the same level in Oct 17 as witnessed in Sep 17. 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 6.65%-6.75% during Oct 17.
External Sector:  Excess liquidity in the banking system and increase in forex reserves impart an appreciating bias to rupee going ahead. However, FII outflows in the equity markets given that US Fed's unwinding of its balance sheet and overvaluation in rupee will lead pressure on rupee in the month of Oct 17 as compared to the last month. D&B expects the rupee to trade in the range of around 64.9-65.1 per US$ during Oct 17.

Detailed Commentary

“While the impact of the structural reforms i.e. Demonetisation and GST was very much expected, the quantum was not estimated and hence the current slowdown in the economy is painful. There has been improvement in some parameters in the recent period, and we hope that the rebound in industrial production, especially in capital goods is not just driven by festive led demand and is on a sustainable basis. On the positive side, recovery in exports, moderate interest rate, lower inflation rate, controlled trade deficit, sizable FDI inflows and the government's commitment towards fiscal discipline are likely to pave the way for the economy to recover from the current scenario on a strong note. Moreover, the fundamental consumption story of India remains undented and the revival in the rural economy will provide further boost. It is also expected that the continued reforms aimed at the formalisation and increase in accountability in the economy will help in preventing leakages and flow of resources in the desired direction and provide a strong foundation for a robust and sustainable growth process” said Dr. Arun Singh, Lead Economist Dun & Bradstreet India. We believe that the slowdown has bottomed out, however, the stage and pace of recovery would critically depend on the initiatives that the government takes from now onwards to boost the growth momentum, especially the private sector investment, without which we will not be able to aim for an ambitious growth rate” he added.

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