D&B pegs GDP growth for Q2 FY10 at 6.3%

Key Economic Forecast

Real Economy: IIP grew by 9.1% during Sep-09 after growing by an upwardly revised 10.9% during Aug-09, underpinning the sustained recovery path that the Indian economy has set upon. However, there exist certain downside risks to growth such as mounting inflationary expectations and a lower agricultural growth due to deficient rainfall. While these factors pose certain downside risks to production, the IIP growth figures during the second half of FY10 are likely to remain stable as impact of low base sets in. D&B expects the IIP growth during H2 FY10 to moderate from the current level. D&B expects IIP to have grown by 9.0%-10.0% during Oct-09.

Price Scenario: The WPI inflation surged to 1.3% during the month of Oct-09 primarily driven by the surging prices of agricultural commodities. Given that the surge in food articles prices is emanating from supply side constraints, the Government has initiated a slew of measures such as reducing/waiving import duties for a number of agricultural commodities, banning export of edible oils and pulses, banning future trade in some essential commodities etc. Further, reining in inflationary expectations has been accorded high priority by the RBI in the recent monetary policy review in recognition of the rise in food and asset prices. D&B expects the WPI inflation to average between 2.8%-3.1% during Nov-09.

Money & Finance: The RBI's decision to maintain status quo in terms of key policy rates coupled with unwinding of several liquidity augmentation measures during the second quarter review of monetary policy, largely indicates the start of a tight monetary policy. Although the RBI's current monetary policy stance is largely non-disruptive, it is an indication that monetary contraction measures could be underway very soon. Further, given that SCB's holding of SLR securities were already at 32.2% of their NDTL (as on 23-Oct-09), the recent SLR hike is not likely to have immediate impact either on liquidity or bond yields. D&B expects 15-91 day T-Bill yield to average at around 3.1%-3.3% and ten-year G-sec yield to average at around 7.6%-7.8% during Nov-09.

External Sector: The performance of the domestic stock market coupled with the emerging trend in the global commodity prices is likely to play a pivotal role in determining the future trend in the value of rupee vis-à-vis US Dollar. D&B expects the rupee to witness moderate appreciation from the current levels in the near future albeit with some bouts of volatility. D&B expects the rupee to remain at around 46.30-46.60 per US$ during Nov-09.
 

Dun & Bradstreet's Macro Economic Forecasts
	Forecast	Latest Period	Previous Period
Inflation W.P.I	2.8%-3.1% Nov-09	1.34% Oct-09	0.50% Sep-09
Inflation C.P.I (I.W)	11.7%-11.9% Oct-09	11.64% Sep-09	11.72% Aug-09
Exchange Rate INR v/s $	46.30-46.60 Nov-09	46.72 Oct-09	48.44 Sep-09
I.I.P Growth	9.0%-10.0% Oct-09	9.12% Sep-09	10.96% Aug-09
15-91 day's T-Bills	3.1%-3.3% Nov-09	3.02% Oct-09	3.02%Sep-09
10 year's G-Sec Rate	7.6%-7.8% Nov-09	7.83% Oct-09	7.69%Sep-09
Bank Credit*	10%-10.5% Nov-09	9.5% Oct-09	12.6% Sep-09
All figures are monthly average * Refers to End Period

Detailed Commentary

Sustained improvement in the domestic industrial activity in the last few months and the improving business sentiment underscores D&B's view that the Indian economy is set on the recovery path. Moreover, the higher fund mobilisation through public issues as well as private placements, coupled with large oversubscription of new issues, is an indication of the return of the risk appetite of investors.

“The growth of 10% (y-o-y) in the industrial production (IIP) on an average in the last two months reinforces our view that the domestic economy is set on a revival mode. This, coupled with the fact that many developed economies are also gradually moving out of recession, has helped in turning the overall business sentiment positive. However, lower kharif output coupled with rapidly mounting inflationary pressures could turn out to be detrimental to the recovery process. At the backdrop of these downside risks to growth, the continuation of earlier announced stimulus measures may be warranted”, stated Mr. Kaushal Sampat, COO, Dun & Bradstreet India. Mr. Sampat further stated, “The timing and the extent of the monetary policy tightening will play a crucial role in determining the growth prospects going forward. Since the efficacy of monetary tools in curbing food articles inflation is expected to be limited, the Government may consider other measures to tackle the supply side constraints.”