August 27, 2007
CRISIL :Outlook on Indian economy

• Industrial growth to be moderate yet buoyant

• Exports continue to decline; imports robust

The impact of rupee appreciation is clearly evident from the export growth, which has declined in US$ terms and has dropped sharply in rupee terms. Some stabilisation in the rupee will help bolster export momentum; however, continued sharp appreciation in rupee value will erode the competitiveness of Indian exports. Imports, on the other hand, will continue to gain from domestic activity and expensive rupee.

• Sharp rise in global crude prices, a critical risk to inflation

Some moderation in the interest-sensitive sectors suggests that the anti-inflationary stance of the RBI is beginning to take effect. Future movement of inflation in primary articles hinges on monsoon. So far, the monsoon signals have been positive. However, the sharp rise in global crude prices has emerged as a critical risk to inflation. We expect inflation to hover around 5 per cent in 2007-08.

• Credit offtake to moderate

Due to policy measures taken by the RBI, considerable amount of liquidity has been sucked out from the system. Credit growth has moderated, although deposit growth continues unabated. Overall, we expect the moderation in credit offtake to continue as compared to the last year.

• Rupee to trade at 40-41 against the dollar

Net inflows may slow down in the short-term as the effects of the sub-prime mortgage market are felt worldwide. However, the medium-long term effects should not be significant. A continued Central Bank intervention will keep a check on any appreciation in the rupee above 40.5 per dollar. On balance, the rupee is expected to trade in the range of 40-41 to the dollar by the fiscal year-end.

Going forward, on the interest rate front, we expect the RBI to continue to intervene in the market to keep the interest rates in line with the policy rates. Call rates have settled between the RBI’s signal rates of repo and reverse repo of 6.0-6.5 per cent due to the series of monetary tightening measures announced by the RBI. The yield on the 10-year G-sec also increased and we expect it to remain in the range of 7.8-8.0 per cent in the long run.

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