INDIA - India's industrial activity should firm up in the second half of the current financial year behind recovering consumption demand and improved growth in exports, while overall inflation should ease, notes a report from CRISIL (NS:CRSL) released on Friday.
"So far, high food inflation, elevated interest rates and slowing credit growth have affected consumption recovery. However, with food inflation showing signs of easing, the space for discretionary consumption is expected to rise," the report states.
In addition, the rural economy will most likely improve in the coming year following healthy agricultural production this year, it adds.
However, the urban economy is under waning support from credit growth as interest rates are now elevated. A lower fiscal impulse from the government is also likely to have a moderating impact on GDP growth. Though the government capex is likely to revive in the second half of this fiscal, growth is expected to moderate relative to the previous fiscal. A revival in private investment is critical to sustain the investment momentum, the report points out.
Global trade is expected to improve and support export growth this year. However, geopolitical tensions remain a risk for trade flows and supply-chain pressures for industry. Exports will have to navigate increased uncertainties arising from the possibility of a US-China tariff war next year, according to the report.
Overall, elevated interest rates and fiscal consolidation are likely to slow GDP growth this fiscal. We expect GDP growth at 6.8 per cent on-year this fiscal compared with 8.2 per cent in the previous fiscal, with risks tilted downwards.
We expect food prices to ease sequentially in the coming weeks. Vegetable prices tend to come down in December when the kharif crop enters the market. A high base from last year will also help lower inflation since vegetable prices missed their seasonal decline last year. Pressure from edible oil prices, though, will have to be monitored.
The report expects non-food inflation to be benign for the rest of the fiscal year, too, considering subdued domestic demand conditions and soft global prices.
"Overall, we expect inflation to soften in the coming months led by food inflation; however, rigidity in vegetable and edible oil prices keep the upside pressure high. In our base case, we expect inflation to average 4.6 per cent this fiscal with some upside bias to the forecast and expect a policy rate cut in February," the report added.
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