Dun & Bradstreet, a global leader in business decisioning data and analytics, has released its Economy Observer report for October 2024. Economy Observer is a monthly report that shares an in-depth analysis on key macroeconomic developments in India and provides a monthly forecast of key economic indicators, providing insight into the expected direction of the Indian economy.
The Index of Industrial Production (IIP) contracted by 0.14 per cent y/y in August 2024, following growth of 4.7 per cent y/y in July 2024. The mining sector continued its sluggish performance with a sharp contraction of 4.3 per cent, mainly due to monsoon-related seasonality. The electricity sector also witnessed a decline, while the manufacturing sector posted a marginal improvement, growing by 1 per cent y/y.
Use-based indices reflect weakness, with primary goods and consumer non-durables registering negative growth, and moderation in growth of capital goods and construction/infrastructure sectors. Nonetheless, Dun & Bradstreet expects industrial production to rebound, with IIP growth projected at 4.0 per cent in September 2024. The revival in industrial performance is to be driven by festive demand and a growing appetite for capital investment.
Consumer price inflation surged to a nine-month high of 5.49 per cent in September 2024, whereas wholesale price inflation picked up to 1.84 per cent y/y. The incessant rise of food prices in September, soaring by more than 9 per cent, has been responsible for the rise in both WPI and CPI. In addition, primary articles accelerated by 7 per cent.
Dun & Bradstreet expects wholesale inflation to settle at 2.0 per cent, while retail inflation is forecasted to remain above the central bank's target at 5.3 per cent in October 2024. Food and beverages, which comprise 45.9 per cent of the total CPI, are a major concern due to the erratic monsoon patterns. Moreover, India's dependence on crude oil amid escalating geopolitical tensions necessitates caution regarding the near-term inflation outlook.
The softening of short-term yields signals stability in India's financial markets, reinforcing sufficient liquidity and a smooth growth trajectory. This is further supported by the early redemption of 10-year government bonds, infusing further liquidity in the economy. Dun & Bradstreet expects the yield on 15-91 days Treasury Bills to remain stable at 6.6 per cent, while the 10-year G-Sec yield is projected to hover around 6.8 per cent in October 2024.
While long-term yields have seen slight fluctuations due to inflationary pressures, the prospect of rate cuts has diminished. The monetary policy actions in developed markets and uncertain geopolitical events would continue influencing the yield trajectory. Dun & Bradstreet anticipates credit growth to moderate further to 12 per cent in October 2024, as the Reserve Bank of India (RBI) maintains a stricter policy stance to preserve asset quality.
India's external sector is facing newer challenges, with Foreign Portfolio Investment (FPI) inflows tapering off and exports continuing to struggle against a build-up in import demands. The monetary stimulus offered by developed markets to support their sluggish growth, combined with looser monetary policies, has caused the recent FPI outflows.
This, in turn, has weakened the Indian Rupee (INR) against the US dollar (USD). Dun & Bradstreet forecasts the Rs to depreciate further, reaching Rs 84.1: USD 1 by November 2024. Geopolitical tensions, supply chain disruptions and capital market vulnerabilities are expected to keep the currency under pressure in the near term. However, India's strong appeal as an investment destination remains intact, supported by a favourable investment profile and near-record-high foreign exchange reserves, which provide substantial import cover.
Arun Singh, Global Chief Economist, Dun & Bradstreet said, “India's economic outlook shows a mix of resilience and caution. Industrial production fell in August, but a recovery is expected with seasonal changes and increased demand due to festivity. The financial sector remains stable, supported by strong credit and liquidity.
However, high food prices and supply issues are keeping inflation above the Reserve Bank's target, limiting rate cuts. The rupee faces pressure from foreign investment outflows and a strong US dollar, along with geopolitical uncertainties. Despite these challenges, India's large foreign exchange reserves provide a buffer against external shocks. Overall, the outlook emphasizes domestic strengths while advocating for caution.” (ANI)