What we gleaned from the RBI forward looking surveys

10 Apr 2023 , 08:44 AM

These surveys pertain to a whole host of key macro data points and includes the outlook for consumer confidence, inflation expectations, industrial outlook, capacity utilization, bank lending and the infrastructure outlook. Here is a gist of what the latest RBI forward looking surveys published in April 2023 had to say.

Consumer confidence continues to recover

The RBI Consumer Confidence Survey is a quick look at the current expectations and the outlook one year down the line. The current consumer confidence in the Indian economy has improved over the previous survey 2 months back. However, the current expectations continue to be in pessimistic zone (less than 100). On the other hand, the consumer confidence outlook a year later has tapered slightly but is in optimistic zone (above 100). 

In terms of current outlook, the consumer confidence has improved on the macroeconomy, jobs, income, and spending. However, the outlook on inflation has tapered in the last 2 months. On a one-year forward basis, there is an improvement only in jobs outlook. In terms of other variables, the consumer flat is either flat or has reduced. Clearly, it seems like the banking crisis and fears of recession has clouded the risk perception of consumers on a one-year basis, although they continue to be positive about the present.

Inflation expectations have also tapered since the last survey

Inflation expectations are an important part of how people react to inflation. That is why the RBI has traditionally focused, not only on managing inflation, but also in managing inflation expectations. Here inflation is surveyed in terms of the current outlook and the outlook 3 months down the line. In terms of the current outlook, the inflation expectation is down 70 bps compared to the February 2023 RBI survey report. 

On the other hand, the inflation expectation 3 months down the line has also tapered, but just by 30 bps compared to the previous survey of February. Inflation expectations are broadly pegged to taper across food inflation, fuel inflation and core inflation. That is assuming that there are no major disruptions to inflation either from the global banking crisis or from the ongoing Russia Ukraine war.

 

Capacity utilization improves, albeit marginally

The capacity utilization is one of the best high frequency indicators of manufacturing sector. It effectively captures the capacity utilization changes as well as the ratio of inventories to finished goods, to get a picture of inventory stocking. In the third quarter of FY23, the capacity utilization of Indian industry improved by 30 bps from 74% in Q2 to 74.3%. New orders received by manufacturing companies were at par with Q2FY23 but substantially higher than the order flows of pre-COVID levels. 

Over the last 5 quarters leading up to Q3FY23, the ratio of inventory to sales improved from 58.1% to 60.6%. During the same period, the ratio of raw materials to sales improved from 28% to 30% while the ratio of finished goods to sales reduced from 22.4% to 21.9%. While the raw material ratio is an indication of inventory stocking and is manufacturing positive, the ratio of finished goods to sales shows order backlogs being executed rapidly. That is broadly a positive takeaway and shows optimism on growth.

Optimism among manufacturing companies for Q4FY23

The survey of manufacturing companies touches upon the assessment of Q4FY23, which just completed in March 2023 and the outlook for Q1FY24 for the quarter ending in June 2023. Let us look at the Q4 assessment first. Indian manufacturing companies continue to be positive on demand conditions for Q4FY23. While business volumes have been positive, most of the manufacturing companies surveyed have admitted to some pressure on selling prices due to tight demand conditions. 

However, they have also reported moderation in the price of raw materials and wage costs, so profit margins should hold up better. On the outlook for Q1FY24, the manufacturing company outlook is slightly less optimistic on demand conditions due to global headwinds. The pressure on export demand is likely to continue. However, for Q1FY24, the manufacturing companies expect selling prices to pick up and the profit margins to improve as rate impact may have peaked out.

Economists expect GDP upgrades and lower of inflation estimates

The survey of professional forecasters has given positive vibes on the GDP growth and the inflation front. Let us look at the GDP outlook first. Real GDP growth for FY23 has been upped by 10 bps over February to 7%. The FY24 GDP growth is expected at 6.0%. In terms of granular quarterly GDP growth estimates, the survey pegs Q4FY23 GDP higher by 20 bps at 4.6% while the Q1FY24 GDP is pegged 30 bps higher at 6.7%. 

On the inflation front, the survey has pegged FY23 inflation at 6.7% and expected to taper to 5.2% in FY24. Over the next one year, and this is important, the core inflation is also expected to moderate by more than 100 bps. But the biggest relief would come from the outlook for current account deficit as posted by the economists surveyed. They have pegged current account deficit at 2.6% of GDP for FY23 and a more normalized 2.0% of GDP for FY24. This is likely to be triggered by a surge in the export of services from India.

Loan growth expected to be robust in coming quarters

 In the last few months, the loan books of banks have grown at a rapid rate while the deposits have struggled to keep pace. This has taken the credit deposit ratio to multi-year high levels. If you look at the assessment of Q4FY23 loan growth, the probability of a moderate increase is close to 80% with only 3.4% probability of a moderate decrease in loan demand. In terms of the estimate for Q1FY24, there is an 83.3% probability of moderate increase in loan demand with just 3.3% probability of moderate decrease. 

The sentiments are clearly veering towards further growth in loan demand. The increase in loan demand is expected to come mainly from the manufacturing sectors, infrastructure, and the services sector. But bulk of the loan growth is still likely to be led by retail loan demand. Agriculture lending is expected to be flat in the Q4FY23 quarter and also in the Q1FY24 quarter. Interestingly, the markets are also betting on easing of lending norms and lending hesitancy, which has been quite rampant post the COVID pandemic.

Service sector optimism continues for next few quarters

In terms of the assessment of the Q4FY23 quarter for service companies, the consensus emerging is that while top line growth would be robust, pressure on costs would continue. Compared to the previous survey in February, the optimism on robust selling prices and margins has reduced. This could be attributed to the growing headwinds in the global market and the ongoing banking crisis globally. Over the next 3 quarters, the assessment is that the demand for services would continue to rise, but input costs would also continue to escalate. 

To sum it up, the volume game on the economic front continues to be very optimistic. However, in manufacturing and in the services sector, there are concerns that input costs and operating costs could be an issue. For a more detailed assessment, we have to await the June 2023 survey of the RBI.