Dun & Bradstreet's Economy Forecast: September 2009

The RBI to reverse its expansionary monetary policy by Dec-09

Key Economic Forecast

Real Economy: Improvement in industrial activity has continued as is indicated by the 5.56% growth in IIP for manufacturing sector during May-Jul 09 as compared to 0.09 during Feb-Apr 09. Moreover, a double digit growth in consumer durables segment for the fourth consecutive month indicates improving demand conditions and augurs well for the industrial sector.

Nonetheless, the deficient rainfall could have a negative impact on the growth of consumption demand going forward. If weak demand conditions persist in the revival phase, it could hamper industrial growth. D&B expects IIP to have grown by 7.0%-8.0% during Aug-09.

Price Scenario: With the area sown under kharif crop reporting a decline due to the deficiency in rainfall, concerns of a potential fall in kharif crop production and a consequent increase in prices of agricultural commodities have started rising. Given the high prices of primary food articles and waning base effect, D&B expects the headline inflation to turn positive by Sep-09 and it might reach around 6.0% by Mar-10. D&B expects the WPI inflation to average between 0.1%-0.3% during Sep-09.

Money & Finance: While short-term yields are likely to remain low in the near future indicating the comfortable liquidity conditions, the medium to long term yields might remain elevated on account of the huge government borrowing during FY10, thereby leading to the steepening of the yield curve. Given the mounting potential inflationary pressures, the RBI might consider reversing its expansionary monetary policy. D&B expects that the RBI might announce hike in CRR by Dec-09. D&B expects 15-91 day T-Bill yield to average at around 3.8%-4.0% and ten-year G-sec yield to average at around 7.4%-7.6% during Sep-09.

External Sector: Although the y-o-y growth in exports (US$ terms) continued to decline for the tenth consecutive month in Jul-09, the seasonally adjusted data for exports indicates a reversing trend. On the import front, the absolute values of imports over the past few months point to some stability in import demand conditions. In the forex market, dollar demand from importers & oil refiners and strengthening of the US Dollar against major global currencies weighed down the rupee during the month of Aug-09. The rupee is expected to remain at around 48.10-48.30 per US$ during Sep-09.
 

Dun & Bradstreet's Macro Economic Forecasts
	Forecast	Latest Period	Previous Period
Inflation W.P.I	0.10%-0.30% Sep-09	(-)0.71% Aug-09	(-)1.36% Jul-09
Inflation C.P.I (I.W)	12.10%-12.30% Aug-09	11.89% Jul-09	9.29% Jun-09
Exchange Rate INR v/s $	48.10-48.30 Sep-09	48.34 Aug-09	48.48 Jul-09
I.I.P Growth	48.10-48.30 Sep-09	48.34 Aug-09	48.48 Jul-09
15-91 day's T-Bills	3.80%-4.00% Sep-09	3.14% Aug-09	3.01% Jul-09
10 year's G-Sec Rate	7.40%-7.60% Sep-09	7.50% Aug-09	7.15% Jul-09
Bank Credit*	15.00%-15.50% Sep-09	14.10% Aug-09	15.80% Jul-09
All figures are monthly average * Refers to End Period

Detailed Commentary

Although a 6.1% GDP growth and the gradual improvement in industrial production point towards the formation of a base for economic recovery, certain developments in recent months such as the deficient monsoon and the surging food articles' inflation pose significant downside risk to the revival process. The deficiency in monsoon could not only be detrimental for the agriculture sector but might also dampen domestic demand conditions - which have been showing some signs of stability in the last few months. The expected fall in agriculture production might put significant upward pressure on inflation, which has already begun to inch up.

“While we maintain our initial view that the Indian economy would witness a sustained recovery in the second half of FY10, we may revise downwards our estimates for the pace at which this recovery would occur, given the emergence of certain risks to growth such as the deficient monsoon and surging inflation,” stated Mr. Kaushal Sampat, COO, Dun & Bradstreet India. Mr Sampat further stated, “Given the downside risks to growth and the surging inflation on the one hand, with the limited scope for further fiscal support on the other, the monetary authority would be faced with the policy dilemma of balancing growth while containing inflation. We expect the RBI to hike the CRR by the end of the current calendar year in order to mop up excess liquidity from the system and reduce demand side pressures on inflation.”