Pile up of bad loans and weak currency not favourable for growth
Real Economy: We expect IIP to have moderated in the month of August 2018 largely owing to the base effect. Besides, businesses are likely to be impacted by the rise in borrowing cost, both domestically and globally, and increase in input prices. The pile-up of bad loans and the subsequent Non Performing Assets (NPAs) resolution process has weighed upon investment, thereby impacting the industrial activity. D&B expects Index of Industrial Production (IIP) to have moderated by 3% - 3.5% during Aug-18.
Price Scenario: The base effect is likely to keep the overall inflation rate moderate till Nov 18. However, the upside inflationary pressures to the economy remain unabated. Rupee depreciation, elevated crude oil prices coupled with an increase in non-oil imports pose inflationary pressures to the economy. D&B expects the CPI inflation to be in the range of 4.2 - 4.4% and WPI inflation to be in the range of 4.9% - 5.1% during Sep-18, respectively.
Money & Finance: The strong depreciation in rupee along with the widening of the current account deficit, continued surge in crude oil prices and trade war will drive yields across the curve higher. Strengthening of dollar and investors' risk aversion towards emerging countries will continue to exert upward pressures on yields. Further RBI intervention in the forex market, unless managed carefully, will curb domestic liquidity and add to the pressures in the banking system. D&B expects 15-91-day T-Bill yield to average at around 6.7% - 6.9% and 10-year G-sec yield at around 7.9% - 8% during Sep-18.
External Sector: The rupee is expected to remain under pressure in the short to mid-term. Elevated crude oil prices, rising US treasury yields and strengthening of the dollar, heightened geopolitical tensions, trade wars, and economic sanctions would continue to impart depreciation pressures on the rupee. D&B expects the rupee to depreciate to around 72.3 - 72.5 per US$ during Sep-18.