WPI inflation likely to cross 7.5% by March: D&B

Key Economic Forecast 

Real Economy: GDP growth in Q3 FY10 is expected to be lower compared to Q2 FY10 on account of weak performance of the agriculture sector. Agriculture sector is likely to grow at sub-zero level in the Q3 FY10 as the impact of uneven monsoon on agriculture production is likely to be captured in the third quarter, which is the harvest season. While the agriculture sector is expected to exert downward pressure on growth, industry and services sectors are expected to drive the economic activity. D&B expects IIP to have grown by 8.0%-9.0% during Nov-09. 

Price Scenario: The sharp rise in the WPI inflation driven by the relentless increase in prices of primary food articles is likely to be a key concern in the near future. Moreover, with the revival in the global economic activity, the demand for crude oil is likely to witness an increase in 2010, leading to a rise in international oil prices. This, in turn, is expected to exert upward pressure on the domestic prices of minerals oil. In view of rising prices of food articles and manufactured products and the expected increase in the fuel group inflation in the ensuing months, D&B has revised its inflation forecast upwards to more than 7.5% by the end-March FY10 as against the initial estimate of 6%. D&B expects the WPI inflation to average between 6.40%-6.60% during Dec-09. 

Money & Finance: Unlike in the corresponding period of the previous fiscal, domestic liquidity conditions have remained comfortable in the third quarter of FY10 as reflected in the lower call rates and bank's recourse to reverse repo window. While advance tax payments by the corporate sector in the mid-Dec 09 is expected to result in some cash outflow, redemptions and interest payouts from G-sec & State Development Loans as well as government borrowing holiday for almost three weeks (between 18-Dec-09 to 8-Jan-10) will again inject liquidity in the system. D&B expects 15-91 day T-Bill yield to average at around 3.3%-3.5% and ten-year G-sec yield to average at around 7.7%-7.9% during Dec-09. 

External Sector: In the forex market, the rupee largely remained range bound, however with some bouts of volatility. While the rupee is expected to remain around current levels in the short run, it might experience some appreciation from current levels in the long run on expectations of sustained capital inflows. D&B expects the rupee to remain at around 46.30-46.50 per US$ during Dec-09. 
     

Dun & Bradstreet's Macro Economic Forecasts
	Forecast	Latest Period	Previous Period
Inflation W.P.I	6.40%-6.60% Dec-09	4.78% Nov-09	1.34% Oct-09
Inflation C.P.I (I.W)	11.6%-11.8% Nov-09	11.49% Oct-09	11.64% Sept-09
Exchange Rate INR v/s $	46.30-46.50 Dec-09	46.57 Nov-09	46.72 Oct-09
I.I.P Growth	8.0%-9.0% Nov-09	10.35% Oct-09	9.63% Sept-09
15-91 day's T-Bills	3.3%-3.5% Dec-09	3.02% Nov-09	3.02% Oct-09
10 year's G-Sec Rate	7.7%-7.9% Dec-09	7.79% Nov-09	7.83% Oct-09
Bank Credit*	10.6%-11.0% Dec-09	10.0% Nov-09	9.5% Oct-09
All figures are monthly average * Refers to End Period

Detailed Commentary
Although D&B expected some improvement in the GDP growth figures during Q2 FY10 on the back of pick up in the domestic economic activities, a 7.9% growth came as a pleasant surprise. The various economic stimuli packages by the Government have played a major role in boosting the Q2 numbers. Going forward, improvement in private consumption expenditure and investment would be crucial in maintaining the growth momentum and mitigating the impact of expected reduction in the Government spending. 

“Substantial GDP growth during the second quarter coupled with the double digit IIP growth during Oct-09 indicates that the revival of the Indian economy has begun to gain ground and augurs well for the future growth outlook of the economy. Having said that, it is important to note that the third quarter GDP is likely to be relatively lower compared to Q2 as the adverse impact of an uneven monsoon on agriculture output is likely to be captured in the third quarter” stated Mr. Kaushal Sampat, COO, Dun & Bradstreet India. Mr. Sampat further stated, “While we expect economic activity to gather momentum in the medium term, there exists some downside risks to growth such as mounting inflationary pressures and the impact of expected lower agriculture output on consumption demand. The food articles inflation is already at an alarmingly high level and given its deeper socio-economic implications, it has potential to derail overall economic recovery if timely action is not taken.”