Real Economy: The initiatives taken by the RBI for policy rate transmission and the various measures announced by the government is expected to boost the corporate sentiment and ease some of the issues faced by the various sectors. With floods affecting many states, rural demand is likely to remain impacted in the near term. However, a pick-up in the industrial production will only be gradual and an uptick is expected to be visible during the festive months of Sept and Oct 2019. D&B expects Index of Industrial Production (IIP) to have grown by 4.0-4.5% during Aug-19.
Price Scenario: As expected, food prices have started edging up with inflation in vegetables and pulses inching close to 7%. The sudden spike in oil prices will now impart upward inflationary pressures. However, low commodity prices globally, weak demand and subdued economic activity will help in keeping the inflation rate within the RBI’s target range. D&B expects the CPI inflation to remain at 3.7%-3.9% and WPI inflation to be in the range of 0.8% - 1.0% during Sep 19, respectively.
Money & Finance: RBI’s initiative to link the bank lending rates to external benchmark rates such as repo rate, treasury bills etc. is expected to improve the monetary transmission and keep interest rates low. The monetary easing taking place globally with the Fed reducing the rates for the 2nd time in 2019 will keep the bond yields low. Out of the budgeted Rs 7.1 tn, the government has already borrowed Rs 5.4 tn putting less pressures on borrowing during the H2 FY20. This along with more than expected transfer of funds by the RBI is expected to lower concerns on fiscal stimulus spending and keep the yields benign. D&B expects 15-91-day T-Bill yield to average at around 5.2%-5.4% and 10-year G-sec yield at around 6.4%-6.6% during Sep-19.
External Sector: Rupee is likely to remain under pressure amidst trade tensions, geopolitical risks including the current oil price hike, risks of no-deal Brexit, strengthening of dollar and FII outflows. Domestically, dismal corporate earnings and weak domestic growth would also weigh upon rupee. D&B expects the rupee to depreciate further from the previous month to 71.6-71.8 per US$ during Sep-19.