A prolonged pause in the policy rate is expected unless the US FED pivots earlier

Key economic forecast:

Real Economy: With moderation in inflation (both retail and wholesale), there is room for both fiscal expansion and monetary accommodation, supporting domestic demand and in turn industrial activities. The decline in wholesale prices will provide relief to corporates as they continue to face higher borrowing costs. Exporters will continue to face challenges as global trade remains subdued. Dun & Bradstreet expects the Index of Industrial Production (IIP) to have grown by 0.5% – 0.7% during April 2023, partly due to the base effect.

Price Scenario: Dun & Bradstreet expects inflation to moderate as global commodity prices continue to ease as the domestic supply side pressures ease and slower INR depreciation reduces imported inflation. However, the El Nino condition poses upside risks to our medium-term forecasts. Given the moderation in inflation, the Monetary Policy Committee (MPC) may opt for a prolonged pause in the interest rate cycle, unless the US FED pivots earlier. Dun & Bradstreet expects the Consumer Price Inflation (CPI) to be in the range of 4.1% – 4.3% and Wholesale Price Inflation (WPI) to be around (-) 2.6% – (-) 2.4% in May 2023.

Money & Finance: Dun & Bradstreet expects Indian G-sec yields to remain rangebound and largely unchanged in May 2023 compared to the previous month. Retail inflation print came below the Reserve Bank of India’s (RBI) upper tolerance limit for the second consecutive month raising hopes for the MPC to maintain status quo in the June policy meeting. We expect bank credit to continue strengthening, potentially reaching a multiyear high (~11 year) in the month of May 2023, an indication of sustained economic recovery. A survey conducted by Dun & Bradstreet supports this expectation that firms’ demand for short and long-term funds for Q2 2023 have touched 11-year and 2-year high, respectively. Dun & Bradstreet expects the 15-91-day Treasury Bills yield to remain at around 6.8%-6.9% and 10-year G-Sec yield to be 7.0%-7.2% for May 2023.

External Sector: Rupee is likely to remain under pressure in the month of May 2023. The Indian economy is exhibiting resilience to external headwinds and is expected to perform better compared to other emerging economies. The rate hike by the US Federal Reserve in May 2023 and concerns over the political standoff over US debt ceiling is supporting the dollar causing depreciation pressure on the rupee. However, the domestic currency may remain resilient in the medium term led by narrowing of current account deficit (CAD) and foreign capital inflows. Dun & Bradstreet expects the rupee to depreciate to 82.2 per US$ during May 2023. 

Dr Arun Singh, Global Chief Economist, Dun & Bradstreet said, “In India, the softening of inflationary pressure is creating room for an extended pause in the policy interest rate. Despite the increase in lending rates, bank credit to the commercial sector is strengthening, current account deficit has eased, and inflation pressures have subsided, all of which point towards growing macroeconomic stability. It is however, pertinent to remain vigilant against potential risks from increase in crude oil prices, probability of El Nino conditions to create droughts along with increased global financial instability and unfavourable geopolitical developments”.