Dun & Bradstreet Economy Forecast No change expected in Repo & Reverse Repo rates

Mumbai, India, Oct 19, 2010 (Washington Bangla Radio / pressreleasepoint) Real Economy:Expected improvement in domestic demand conditions coupled with sustained infrastructure investment is likely to support overall industrial activity going forward. Nonetheless, muted exports demand might limit the growth in the manufacturing industries. Going forward, although growth in IIP is expected to remain in single digit, it is expected to average at 8.5% during H2 FY11 above the 5.6% growth recorded in Aug-10. D&B expectsIIPto have grown by6.0-7.0%during Sep-10.

Price Scenario:The headline inflation is expected to moderate further owing to the waning low base effect and the lagged impact of monetary tightening measures taken by the RBI in the first half of the current fiscal. Prices of primary food articles which were at an alarmingly high level in the first half of FY11 are also expected to witness some moderation given the better prospects of agricultural output consequent to the substantial improvement in area sown under Kharif crop during this season. D&B expects theWPIinflation to be around8.0-8.2%during Oct-10.

Money & Finance:Continuing the normalisation of policy interest rates, the RBI increased the repo and reverse repo rates by 25 bps and 50 bps respectively during the mid-quarter review of monetary policy. Consequent to this policy action, many banks have raised their deposit and lending rates. D&B expects15-91 day T-Billyield to average at around6.0%-6.2%andten-year G-secyield to average at around7.9-8.1%during Oct-10.

External Sector:Despite the sharp rupee appreciation, the intervention in the forex market by the RBI through banks has so far been limited as this would lead to excess liquidity pressures in the economy. However, in the event that the rupee continues to rise unabated on the back of robust FII inflows, the RBI might need to intervene in the forex market to cap gains in the rupee. D&B expects therupeeto average at around44.30-44.50per US$ during Oct-10.


Detailed Commentary
After recording a double digit growth of 11.9% during Apr-Jul 10, a single digit growth of 5.6% in IIP was definitely disappointing and below our expectations. While all the major categories in IIP witnessed some moderation, a decline in capital goods production was more significant as it pulled down the overall IIP by almost 4%. Growth in capital goods sector has been volatile since past three months.

"We should not read too much into the monthly IIP numbers, in isolation, given the huge volatility observed in the series during the past few months. Hence, lower than expected growth in IIP during Aug-10 should not raise significant concerns regarding the health of the economy given that other indicators including non-oil imports, commercial vehicle production, and indirect tax collection have shown signs of improvement in the recent past. Moreover, the confidence of India Inc as reflected in D&B's BOI has also improved and augurs well for the growth prospects”, statedDr. Arun Singh, Senior Economist, Dun & Bradstreet India. Dr. Singh further added, “Moreover, the recent surge in FII inflows is in part reflective of optimism regarding the Indian economy. However, the rapid appreciation of the rupee backed by surge in foreign fund inflows would call for the RBI's intervention in the rupee market in turn posing a serious risk on the inflation front, which has continued to remain elevated. Thus, we expect that the RBI might increase the CRR by around 25 bps points in the near future in an attempt to limit any excess liquidity pressures from surfacing, at the backdrop of current surge in foreign fund inflows."

- pressreleasepoint