RBI forward looking Surveys show no signs of Trump Effect

11 Apr 2025 , 11:22 AM

The latest RBI forward looking survey for March 2025, published by the RBI in early April 2025, has some interesting insights about how consumer confidence and inflation expectations are showing signs of improvement; even amidst the global turmoil.

• CONSUMER CONFIDENCE SHOWS DISTINCT IMPROVEMENT

The consumer confidence survey of the RBI looks at current consumer confidence vis-à-vis one-year ago; as well as the one-year ahead expected consumer confidence, compared to the current levels. Compared to the year-ago period, the consumer confidence has improved on a current basis and on a 1-year forward basis. What about the components of consumer confidence? In terms of current perception, only income and spending are showing positive sentiments with improvement. Economic situation, jobs, and inflation is improving, but sentiments are still negative. The picture is more optimistic in terms of 1-year forward expectations with all parameters (except inflation) showing positive sentiments with distinct signs of improvement.

• INFLATION EXPECTATIONS OF HOUSEHOLDS FOR 2025

Household inflation is what family budgets experience, not the CPI inflation reported by the MOSPI. Household inflation is more experience based. The survey presents the inflation expectations based on 3-month forward inflation and 1-year forward inflation. With current inflation down 50 bps on account of lower food prices, the 3 month forward inflation expectation has also fallen by 40 bps while the 1-year forward inflation has fallen by 50 bps. A greater number of households in India are expecting the prices to taper in the near term and the medium term. Household inflation can be at divergence with the CPI inflation.

• RBI RELEASES RURAL CONFIDENCE SURVEY FOR THE FIRST TIME

The first ever rural confidence survey published by the RBI shows substantial optimism among rural households with respect to economic situation, jobs, and spending in the current situation. On a 1-year forward basis, there is optimism across all data points, except prices. Clearly, there is an overhang of the recent experience of high inflation in rural areas.

• OBICUS MANUFACTURING SURVEY SHOWS DEMAND

The survey of manufacturing published based on the data for Q3-FY25, for the period ending December 2024, has shown an improvement in the capacity utilization by 120 bps from 74.2% to 75.4%. At the same time, the seasonally adjusted capacity utilization for Q3 compared to Q2 also improved by 60 bps from 74.7% to 75.3%. However, average order sizes are down sharply.

What about the inventory levels of raw materials and finished goods during the third quarter of FY25? The overall ratio of total inventory to sales is almost flat at 69.4%. However, while the ratio of finished goods inventory to sales is sharply lower sequentially, the ratio of raw materials to inventory is higher on a sequential basis. This is a good sign and shows greater confidence in purchase managers.

• MANUFACTURING OUTLOOK FOR Q4-FY25 AND Q1-FY26

While the Business Assessment Index for Q4FY25 showed an improvement from 108.5 to 110.4 levels, the Business Expectations Index for Q1FY26 has shown a dip from 120.0 to 117.5 levels. This can be largely attributed to the downstream effects of the Trump tariff effects and its impact on GDP and world trade. Compared to Q4FY25, the current Q1FY26 quarter is likely to see higher production and higher order books. In terms of expectations, the overall sentiments are positive, although there are concerns that the situation could continue to be challenging on the input cost front.

• PROFESSIONAL FORECASTERS PAINT HEALTHY MACRO PICTURE

Every alternate month, the RBI forward looking survey, also includes the survey of professional forecasters on GDP growth, inflation, and current account deficit.

• Professional forecasters are cautious about GDP growth. While the GDP growth estimate for FY26 has been placed at 6.5%, the growth for FY27 is placed at 6.6%. This is sharply lower than previous years and the pressure was visible in the last survey itself. Weak demand is likely to hit output across sectors. For FY25 and FY26; share of agriculture in GDP is likely to fall, industry is expected to rise, while services will remain flat.
• As per the professional forecasts, CPI inflation is pegged at 4.2% in FY26 and at 4.3% in FY27. However, core inflation is projected at 4.2% for FY26, but due to the reciprocal tariffs, it is likely to edge higher to 4.5% in FY27.
• On the external trade front, merchandise exports are expected to grow at 3.5% in FY26 and 5.0% in FY27, while merchandise imports are targeted to grow at 4.5% and 5.5% respectively. The current account deficit (CAD) is expected to remain static at 1.0% of GDP in FY26 and FY27, which is a comfortable situation to be in.

Let us finally turn to the bank lending survey.

• BANK LENDING SURVEY THROWS A MIXED PICTURE

Finally, the bank lending survey provides an assessment of banking lending for Q4FY25 and expectations for the 3 subsequent quarters. Bank lending is expected to have moderated across all sectors in Q4FY25, although agricultural loans and personal loans showed growth. Loan conditions are expected to improve in the subsequent quarters, but the survey may not have fully priced in the impact of aggressive repo rate cuts by the RBI.

Overall, the macros are likely to be robust For FY26 and FY27. While household inflation expectations have moderated, input cost push continues to remain a thorn in the flesh.