Economic outlook looks promising: India CFO survey 2018

Economy snapshot

• Indian economy seems to be on the path to recovery and the downsizing that occurred on account of demonetization and uncertainty around the implementation of a unified tax regime seems to have bottomed out. Green shoots across key macroeconomic indicators have become visible and international organizations have acknowledged the policy progress that is underway.
• Economy has started to show signs of growth, rising 6.7% in 3QFY18 compared to growth of 6.2% in 2QFY18. This was driven by a swift rise in industry, especially manufacturing and construction and was further supported by services growth.
• Consumer price inflation seems to be on an upswing and increased to 4.6% in Apr’18. The hike was largely driven by an upswing in core inflation, especially with a broad based increase in services segment while marginal upside movements were seen in clothing and housing segments as well. Food prices remained largely flat with some increase in fruit prices and if monsoons plays out as expected, then the upside risks are likely to remain limited. That said, rising crude price is likely to maintain inflationary pressures in the period ahead.
• After months of easing on the inflation front, price pressures have started to build momentum. During its June-2018 monetary policy meet, the Monetary Policy Committee (MPC) while presenting a balanced view of the domestic economy, alerted on the rising risks from crude prices and the increasing financial market volatility. Owing to rising inflationary pressures and external risks, the committee hiked the key interest rate by 25 basis point to 6.25%, after a four year gap in June- 2018. We expect inflation to maintain a northward momentum, especially if oil prices and rupee valuation do not stabilize in a scenario of hardening of domestic consumption.
• The trade deficit has been climbing steadily with no cushion from exports to offset the impact of rising imports, resulting in a wider trade balance. India’s trade deficit in January 2018 surged to a five-year high of US$16.3 billion. While rising oil prices contributed significantly to increased imports, a large part of the deficit was due to increasing non-oil non-gold imports owing to firming growth and GST-attributed supply-chain disruptions.
• Benchmark bond yield has remained on the upside on the back of weakening sentiments among market participants. One of the key reasons for the up move has come on the back of hardening US bond yields, making that avenue more appealing. In the period ahead, expectations of a rise in inflation and fiscal stretch in the budget may push long term yield higher.