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

Increase in uncertainty has created downside risks to growth

Real Economy: The high growth in Index of Industrial Production (IIP) during Oct -18 was largely due to base effect and partly festive related demand. IIP in the month of Nov - 18 is expected to have grown above 4% mainly due to the base effect. Once the base effect wears out from Dec 2018, it remains to be seen, how the industrial production growth pans out, given the subdued demand conditions domestically and weak global economic outlook. D&B expects Index of Industrial Production (IIP) to have moderated by 4.5%-5.5%during Nov-18.

Price Scenario: While both the WPI and CPI index have increased, indicating rise in prices, the CPI inflation rate has moderated while the WPI inflation rate remains elevated during Nov-18, indicating base effect at play. Moreover, the core inflation remains well above 4% for both CPI and WPI inflation for the last couple of months. The fall in global crude oil prices should be sustained and passed on to the consumers in tandem for it to be effectively captured in the retail and wholesale inflation. We expect the inflation to remain slightly elevated than the previous month as the base effect wanes out and election-related spending drives demand. 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 5.4% - 5.6% during Dec-18, respectively.

Money & Finance: The fall in global crude oil prices, strengthening of rupee and purchase of government securities through open market operations by the RBI is likely to support bond prices. The divergence of the overall retail inflation from core inflation which has been trending above 4% since August 2017, is likely to extend the pause in the repo rate. D&B expects 15-91-day T-Bill yield to average at around 6.8%-7.0% and 10-years-sec yield at around 7.8%-8.0% during Dec-18.

External Sector: The return of foreign investors in the Indian market in the recent period, the fall in the global crude oil supply, narrowing of trade deficit is expected to support the rupee going ahead. D&B expects the rupee to appreciate to around 70.9-71.1 per US$ during Dec-18.

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