RBI to pause in its rate tightening cycle: D&B

Dun & Bradstreet (D&B) has come out with economy observer report with highlights on the fall of the rupee, poor performance of the Indian economy, policy rate and slowdown in consumption and investment demand conditions. The research firm expects rupee to remain at 52.30-52.60 per USD during Dec-11.

IIP growth is expected to register a positive growth, partly due to the waning off of the high base effect. However, the industrial production is expected to remain subdued in the near term as demand condition is likely to witness further moderation. Moreover, the persistence of the problems in the mining sector along with the slowdown in the capex plans of the corporate would keep the industrial activity restrained in the near future. IIP is expected to remain subdued during the coming months and is expected to be in the range of 0.0%-1.0% during Nov-11.

The lagged impact of the hike in the policy rate and the slowdown in the consumption and investment demand conditions is expected to bring down the inflation rate from the current high levels going ahead. The moderation in the global commodity prices is also expected to aid in the downward movement of the headline inflation. However, given the sharp contraction in the industrial production, the RBI is expected to pause in its monetary tightening cycle and continue to hold the policy rates at the present level till at least June 2012 before bringing it down. D&B expects the WPI inflation to be around 8.3%-8.5% during Dec-11.

Credit demand is expected to remain low during the forthcoming period given the slowdown in the investment demand. However, the yield of the 10 year G-sec is expected to ease from the prevailing high levels given the open market operation conducted by the RBI to ease the liquidity conditions in financial system. D&B expects 15-91 day T-Bill yield to average at around 8.6%-8.8% and 10-year G-sec yield to average at around 8.7%-8.9% during Dec-11.

The rupee is expected to remain weak in the near term. The weakening of the global as well as domestic economic conditions along with the deteriorating sentiment and increasing import bill is likely to keep the rupee at low levels. D&B expects the rupee to remain at 52.30-52.60 per US$
during Dec-11.

The sharper than anticipated decline in the industrial output, although in part due to the high base effect, reaffirms the slowdown in the economic growth momentum. Given the contraction in the industrial production, the RBI is expected to pause in its monetary tightening cycle and continue to hold the policy rates at the present level till at least June 2012.

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