What we read from the RBI July 2024 Forward Looking Surveys?

9 Aug 2024 , 10:47 AM

RBI FORWARD LOOKING SURVEYS SHOW GLOBAL HEADWINDS

Every second month the RBI releases these forward looking surveys across key macro variables like consumer confidence, inflation expectations, manufacturing activity, and professional expectations on various macroeconomic variables. The last June 2024 forwards looking survey had covered data pertaining to the month of May 2024. The latest forward looking survey published in August 2024, presents the expectations as of July 2024. Unlike the June survey, the banking survey and the manufacturing survey were also conducted in the August 2024 RBI forward looking survey. The latest survey come at a time when the GDP for FY24 had been much better than expected at 8.2%. In addition, the current account deficit for FY24 had come in sharply lower than expected at 0.7% of GDP, with a current account surplus in the fourth quarter of FY24 ended March 2024.

In addition, the full budget presented on July 23, 2024 had further cut the fiscal deficit target for FY25 by 20 bps from 5.1% to 4.9%. That means; the fiscal deficit is down a full 100 bps since the original estimate for FY24 was presented at 5.9% in February 2023. In between, the RBI kept its repo rates static at 6.5% for the ninth policy meeting in a row, while the global markets are awaiting the first implementation of a rate cut by the US Federal Reserve in September 2024. The overall global backdrop is rather disconcerting at this juncture, which is reflected in the slight deterioration in the survey macros. The global geopolitical situation continues to be tense amidst a chilling stand-off between Iran and Israel. To top it all, Japan is following a counter-intuitive hawkish monetary policy to curb inflation; something that has roiled the Yen carry trade and the global markets overall.

WHAT WE READ FROM THE RBI CONSUMER CONFIDENCE SURVEY

The first part of the RBI forward looking surveys is the consumer confidence survey. This section shows whether the consumer confidence in the economy is improving or worsening compared to the previous reading. The survey also compares consumer confidence level to previous year and also looks at one year forward consumer confidence to give a futuristic view. Here are key takeaways from the consumer confidence survey of June 2024.

• The current consumer confidence index fell for the second consecutive survey in July 2024 and it was much sharper. Consumer confidence fell from 97.1 to a level of 93.9 as compared to the previous survey of May 2024. This indicates a sharp fall in consumer confidence levels over the previous year. This data point had shown a marginal fall in the previous survey. This could attributed more to a combination of the political situation in May and June and the global geopolitical risks, especially in the West Asia region.
• What about the one-year ahead expectations. The one year forward expectations also moved down sharply to 120.7 in July 2024, compared to 124.8 in May 2024. It may be recollected that the peak survey level of 125.2 in March 2024 was higher than pre-COVID levels. Here again, trend is down for two surveys in a row.
• Let us now turn to the break-up of the current perception compared to one year ago. At 93.9 versus 97.1, it is a sign of consumer confidence sentiments in July 2024 being in negative, and also deteriorating sharply since the May 2024 survey. What were the triggers for this shift. There was deterioration across most of the key parameters of consumer confidence. Current perception of the economic situation, jobs, income, and inflation has deteriorated. The only positive signal comes from spending, which has actually shown an improvement in July 2024 over the March and May 2024 surveys. That is actually a good lead indicator of consumer demand.
• Let us finally turn to the one-year ahead expectation for July 2024 compared to the last survey in May 2024? Overall, one-year ahead consumer confidence index has fallen sharply over the last survey from 124.8 to 120.7; and the sharp fall is largely attributed to inflation expectations. There is positive sentiments with sign of deterioration compared to May in economic situation, jobs, and income levels. On inflation, we can see negative sentiments with deterioration over May 2024. Only expectations of Spending display positive sentiments with an improvement over May. Spending could be the saving grace and could largely be driven by a revival in rural spending in India.

Consumer confidence overall shows that one year from now the sentiments would continue to be positive although there is sentimental deterioration over May 2024. This deterioration is being driven by cautious expectations on the macroeconomic conditions, jobs, and income levels. However, the expectations are of a sharp spike in inflation although higher spending could be the saving grace.

WHAT WE READ FROM RBI INFLATION EXPECTATIONS SURVEY

Every alternate month, the RBI puts out inflation expectations based on 3 months ahead data and 1-year ahead data; to get a momentum perspective and a futuristic perspective. The RBI is not only keen on managing inflation but also in managing inflation expectations, as it has a profound impact on the way consumers behave, how they spend, and how consumer demand picks up. Here is our quick reading on the inflation expectations.

• Inflation expectations are higher in terms of current inflation, 3-month ahead inflation and 1-year ahead inflation. The household current inflation perception for July 2024 is up 20 bps at 8.2%, compared to the May 2024 reading. This is the consumer household inflation as experienced by the consumers at the demand points, and not the CPI inflation that MOSPI reports on a monthly basis. This is considered more relevant.
• Let us first look at the findings of the 3-month ahead survey of inflation expectations. It may be recollected that for May 2024, the 3-month ahead inflation expectations had already gone up from 9.0% to 9.2%. For the month of July 2024, 3-month ahead inflation expectation has gone up by another 20 bps from 9.2% to 9.4%. In short, the consumer expectations of 3-month ahead inflation has gone up 40-bps over the last two surveys. This can be partially explained by the election led inflation spike, but the latest survey can be explained by elevated oil prices, market driven pricing of oil and higher mobile tariffs being charged by most of the telecom companies to boost their ARPUs.
• Let us now turn to the findings of the 1-year ahead survey of inflation expectations. It may be recollected that for May 2024, the 1-year ahead inflation expectations had already gone up by 10 bps from 9.8% to 9.9%. For the month of July 2024, 1-year ahead inflation expectation has gone up by another 20 bps from 9.9% to 10.1%. In short, the consumer expectations of 1-year ahead inflation has gone up 30-bps over the last two surveys. This can be explained by the uncertainty on the food inflation front, potential for imported inflation amidst the weakening rupee and a general expectation that inflation would trend higher over time.

It appears there are some concerns in the minds of people over how inflation is shaping up in recent months and they are factoring in higher inflation over the next quarter and the next one year. This has larger implications for RBI policy since the focus of the RBI is generally to keep inflation expectations in check.

SURVEY ON MANUFACTURING FOR Q4FY24

In the last May 2024 reading, there was no survey of manufacturing conducted. Since this pertains to quarterly data, it is only presented in alternate surveys. Here are the key findings from the OBICUS survey of manufacturing in India for Q4FY24.

• Aggregate level manufacturing capacity utilization has gone up from 74.7% in Q3FY24 to 76.8% in Q4FY24. This can be attributed to greater capex and bigger bets that consumer demand (especially rural demand) would recover in the coming months.
• New orders received by manufacturing in Q4FY24 has gone up in Q4FY24 has gone up in sequential terms and also in yoy terms. This is largely on account of the higher capex spending by private sector, triggered by the infrastructure thrust of the government.
• Let us turn to the inventory ratios. While the ratio of finished goods to sales and raw material to sales remained flat in Q4 over Q3FY24, there was a sharp fall in the work-in-progress inventory ratio, which led to a fall in overall inventory ratio too.

The manufacturing survey broadly shows that the positive sentiments triggered by government infrastructure spending are having positive spillover effects. Let us finally turn to the professional forecasts on key variables.

RBI FORWARD LOOKING SURVEY – PROFESSIONAL FORECASTS ON INFLATION

While consumer surveys are based on experiences, they lack the finesse of professional expectations based on mountains of data. That is where professional forecasters come in. They forecasts of professionals carry a lot of empirical weight. Here are key takeaways on professional inflation forecasts.

• As per the survey of professional forecasters, the annual headline inflation, based on consumer price index is expected to gravitate towards 4.5% for FY25 and at 4.5% for FY26 also. This is in line with what the RBI has projected in its latest monetary policy.
• In terms of the immediate trajectory of inflation, the yoy inflation is expected at 4.0% in the Q2FY25 but likely to spike to 4.6%-4.7% in the subsequent quarters. This spike is expected to driven by a rise in food inflation and core inflation.
• CPI inflation, excluding food and beverages, pan, tobacco and intoxicants, and fuel and light (approximating to core inflation), is expected at 3.4% in Q2FY25. However, over the 3 following quarters, the core inflation is expected to spike to 4.0%, 4.3% and 4.5% respectively. This is largely on the back of the geopolitical crisis in the Middle East & West Asia, oil driven imported inflation, higher product pricing and telecom tariff hike.

What the professional forecasters expect is that most of the pressure on inflation in the coming quarters will come from food inflation and core inflation. Both are expected to be above their recent average. That does raise questions about whether the RBI would be able to maintain the full year inflation target of 4.5%. Remember, tat 4.5%, the inflation reading is still 50 bps above the long term target set by the RBI.

RBI FORWARD LOOKING SURVEY – PROFESSIONAL FORECASTS ON GDP

Growth in GDP will continue to be the big story of FY25 but professional forecasters are a little more cautious on full year projections. Here are the key findings.

• The real GDP is expected to grow by 7.0% in FY25, which is a 20 bps upward revision from the May survey. However, it must be noted that the RBI monetary policy has already upped its FY25 GDP growth forecast by 20 bps to 7.2%. Real GDP is expected to grow at a more subdued rate of 6.7% in FY 26 as the law of large numbers catches on.
• The annual growth in real private final consumption expenditure (PFCE) and real gross fixed capital formation (GFCF) for FY25 are pegged at 6.0% (same as March) and 8.0% (60 bps lower) respectively. Apparently, the GFCG estimates are sharply lower after the budget cut the capex allocation growth from 30% in FY23 and FY24 to 11% in Fy25.

For FY25 and FY26, the GDP growth is likely to be driven more by consumption triggers rather than by capital investment triggers. In FY26, the professional forecasts are expecting tapering of agriculture, industrial and services output.

RBI FORWARD LOOKING SURVEY – PROFESSIONAL FORECASTS ON EXTERNAL TRADE

The projections on external trade assume significance in the light of the ongoing Red Sea crisis and current account deficit at 0.7% of GDP in FY24. Here are some key takeaways.

• Merchandise exports (export of physical goods) is projected to grow by 3.8% in dollar terms in FY25 while the merchandise imports are likely to grow 5.3% in FY25. That is a small fall in exports and a spike in imports, possible due to supply chain constraints.
• What about FY26? That still looks positive with merchandise exports and merchandise imports likely to grow by 5.4% and 5.8% respectively on a yoy basis. There is a clear upgrade on export growth and downsizing of import growth, which is positive.
• Finally, on the subject of the current account deficit (CAD), it is projected at 1.0% of GDP in FY25. This would be sharply higher than the 0.7% CAD reported for FY24. The FY26 current account deficit is likely to be marginally higher at 1.1% of GDP.

Trade deficit is likely to be under pressure in the coming quarters, but the X-factor will be the amount of remittances. If it can grow at a robust pace, then CAD can again surprise on the downside.

PARTING THOUGHTS ON BANK LENDING SURVEY FOR Q1FY25

The latest RBI Forward Looking Survey for July 2024 also covers the bank lending for the first quarter of FY25. For Q1FY25, the assessment is that there was moderation in loan demand due to seasonal factors. This can also be attributed to the tighter prudential norms on consumer loans. In terms of expectations for Q2FY25, bankers are optimistic about loan demand growth across sectors, except mining and quarrying. Personal and consumer loans are likely to remain tepid. In Q3 and Q4, bankers appear a lot more upbeat about loan demand across all sectors. However, some pressure on infrastructure loans is expected.

Overall, the picture presented by the survey is one of optimism at a producer level, although there is caution at the consumer level. It remains to be seen, how this dichotomy plays out.