What we read from the RBI March 2024 Forward Looking Surveys

6 Apr 2024 , 11:23 AM

WHY ARE WE LOOKING AT RBI FORWARD LOOKING SURVEYS?

Every second month, the RBI releases its forward looking surveys. April 2024, the RBI has just released the comprehensive forward looking survey for March 2024. This survey essentially covers consumer confidence, expectations on inflation and the survey of professional forecasters on macroeconomic indicators. In addition, there is also the OBICUS survey on manufacturing and the industrial outlook survey that is part of this survey, apart from banker expectations on lending in the next 2 quarters.

Here is a quick dekko at the macroeconomic backdrop to these surveys. Indian continues to report record GDP growth with Q3FY24 GDP coming in at 8.4%. That is a full 110 bps higher than the most optimistic estimates. The GDP growth for Q1 and Q2 were also upgraded, which raises hopes that full year FY24 GDP would be 8% or higher. Markets are also pencilling in 7% GDP growth in FY25. In addition, the current account deficit (CAD) for Q3 came in 1.2% of GDP, with the full year CAD likely to inch up from $31.5 Billion to $35 Billion. That would be CAD at less than 1% of GDP; a very comfortable scenarios.

However, there were concerns too. While the outcome of the elections, the formation of the new government and the full budget presentation remain an overhang, there were 2 major macro shifts in this week. Amidst growing tensions in the Middle East (between Iran and Israel), the Brent Crude prices shot up to beyond $90/bbl. At the same time the rupee has been under pressure due to persistent strength in the dollar. That largely stems from the weakening of the Euro and Pound after their central banks hinted at end of rate hikes.

DECODING THE RBI CONSUMER CONFIDENCE SURVEY

The first part of the RBI forward looking surveys is the consumer confidence survey. Improving consumer confidence impels consumers to spend and also invest in the economy and lies at the core of consumption driven growth. That is why this survey is a key metrics of private spending and consumption expenditure and has larger ramifications for demand in the economy. This survey collects data on the latest consumer confidence level compared to last year and also looks at one year forwards consumer confidence to give a futuristic view. Here are some key takeaways from the consumer confidence survey.

• The current consumer confidence index in March 2024 has increased to 98.5 from a level of 95.1 in January 2024. This indicates a substantial improvement in the consumer confidence levels over the previous year. It had shown similar improvement in January over November also.
• What about the one-year ahead expectations. The one year forward expectations have also moved up to 125.2 in March 2024, compared to 123.1 in January 2023. This level of 125.2 is not only higher than the consumer confidence in pre-COVID India, but it is also a new high and has replicated the growth of January over November.
• Let us now turn to the break-up of the current perception compared to one year ago. At 98.5 versus 95.1, it is a sign of consumer confidence sentiments still being negative, but improving over last year. What were the triggers for this shift. The current perception of price level is still in the negative, but has improved over the last survey in January. In contrast, employment perception has turned neutral while economic situation perception has turned around from negative to positive in March 2024. In terms of income and spending, the sentiments are positive and there is also a sign of improvement in the sentiments in the March survey over January survey.
• So, how are the one year ahead expectation in March 2024 compared to the last survey in January 2024? Overall, one-year ahead consumer confidence index shows positive sentiments and an improvement over the last survey from 123.1 to 125.2. There is substantial improvement in the consumer optimism about the future. The perception of economic situation, employment, income, and spending remains positive with signs of improvement over last survey. On price levels, the sentiments are still negative, but there is improvement over last survey of January 2024.

Consumer confidence is sharply higher over the last survey, both in terms of current status and future perception. Consumer confidence on a 1-year forwards basis is at an all-time high and that signals the rising optimism about the economic future of India.

WHAT THE RBI INFLATION EXPECTATIONS SURVEY SAYS

RBI evaluates inflation expectations based on 3 months ahead data and 1-year ahead data. The RBI is not only keen on managing inflation but also in managing inflation expectations, as that has a profound impact on the way consumers behave. Here are the quick findings from the inflation expectations survey.

• Inflation expectations are lowering, although current inflation is steady. The household current inflation perception in March 2024 is flat at 8.1%, the same level as the January 2204 survey. This is the consumer inflation as experienced by the consumers and not the CPI inflation that MOSPI reports each month.
• In the last survey published in February, there was a dichotomy in that the short term and the long term inflation expectations had moved up. In contrast, this time around, the short and the long term inflation expectations have come down. For instance, the median inflation expectation for the 3-months ahead period has fallen by 20 bps from 2%  to 9.0%. That is because, in the last 2 months, India demonstrated the ability to handle any disruptions caused by the Red Sea crisis. As a result, even the inflation expectation from a 1-year perspective moved lower by 20 bps from 10.0% to 9.8%.
• The big change in the March survey of inflation expectations over the January survey is that the inflation expectations on a 3-month basis and on a 1-year basis have trended lower. This is largely an outcome of how the food inflation situation, the supply chain constraints and the oil spike have been handled by the Indian economy in 2024.
• In terms of the inflation expectation basket, most of the respondents expect the rise in prices and the inflationary pressures for the food category to taper in the next 3 months and they expect pressure from services and non-food items. However, the one-year survey pegs a more broad-based fall in prices.

It looks like consumers are happy with the way the food and fuel inflation have been managed in the last few months and the RBI caution on rate cuts. That gives hope to consumers that inflation should taper. That is reflected in the inflation expectations survey.

RBI SURVEY OF MANUFACTURING SECTOR CAPACITY UTILIZATION

This is a fairly interesting survey which captures the industry trends on the capacity utilization and output of the manufacturing sector. This includes the break-up of inventories too. Here are key takeaways.

• At the aggregate level, the capacity utilisation (CU) in the manufacturing sector has increased in the third quarter (Q3FY24) ended December 2023 from 74.0% to 74.7%. That marks a 110 bps improvement in capacity utilization in last 2 quarters. The capacity utilization had dipped to around 45% at the peak of the COVID crisis, but has since recovered and is back to pre-COVID levels. With capex rising, industries like cement, power and steel showed sharp improvement in the capacity utilization levels.
• Manufacturers reported flat new orders in the third quarter (Q3FY24) as compared to the second quarter. The yoy growth in new orders, however, improved by 10% in value terms. That is positive for the manufacturing sector overall.
• The raw material inventory (RMI) to sales ratio remained stable in the third quarter compared to the previous quarter, while the finished goods inventory (FGI) to sales ratio improved marginally over the previous quarter.
• Between the second quarter (Q2FY24) and the third quarter (Q3FY24), the total inventory to sales ratio improved from 65.9% to 67.7%. This is typically a sign of confidence among the business purchase managers. The ratio of finished goods inventory in this period improved from 24.6% to 26.8%. At the same time, the ratio of raw materials to inventory between the second and third quarter of FY24 improved marginally from 24.4% to 24.8%.

The survey clearly underlines that even as the capacity utilization continues to improve, there is improved business confidence in terms of willingness to lock inventories.

RBI FORWARD LOOKING SURVEY – PROFESSIONAL FORECASTS ON INFLATION

The professional forecasters are the ones who bring in a professional twist to the macro expectations and hence their projections also carry a lot of theoretical weight. This is not to be compared with the consumer perception inflation, which is more about household budget impact. Here are the key takeaways on professional inflation forecasts.

• As per the survey of professional forecasters, the annual headline inflation, based on consumer price index is being projected at 4.5% for FY24 and at similar levels of 4.5% for the next fiscal year FY26 too.
• In terms of the immediate trajectory of inflation, the yoy inflation is expected at 5.1%-5.0%% in the Q1FY25 and is likely to moderate sharply thereafter to 3.8% in Q2FY25. However, in subsequent quarters, inflation is likely back at the range of 4.8%-4.6%.
• CPI inflation, excluding food and beverages, pan, tobacco and intoxicants, and fuel and light (approximating to core inflation), is expected at 3.4% in Q4FY24 and Q1FY25, but rising further to 3.7% in Q2FY25 and further to the range of 4.1%-4.3% in the subsequent quarters. Clearly, the expectation is that the impact of the Red Sea crisis on the food prices, fuel prices and supply chains would be long lasting.

The path of inflation is lower, although quarter to quarter, the inflation may be volatile. What is interesting is that in the coming quarters, the inflation gains are likely to come from food and fuel, with core inflation gains having almost saturated and should start to rise. That is assuming that the fuel inflation is kept under check.

RBI FORWARD LOOKING SURVEY – PROFESSIONAL FORECASTS ON GDP

The message from recent months is that growth is going to the big story of the Indian economy in the coming quarters. Here is what the survey says.

• The real GDP is expected to grow by 6.7% in FY25, which is a 20 bps upward revision from the previous survey. That was necessitated after the Q3 GDP growth came in sharply higher at 8.4%, raising prospects of full year FY24 growth at around 8%.
• The annual growth in real private final consumption expenditure (PFCE) and real gross fixed capital formation (GFCF) for FY25 are pegged at 6.0% (10 bps lower) and 8.4% (30 bps higher) respectively. This shows a sharp revival in the capital investment cycle.

Growth story has been upgraded on the GDP front, but GVA is likely to growth at a slower rate in FY25 and FY26, as compared to FY24.

RBI FORWARD LOOKING SURVEY – PROFESSIONAL FORECASTS ON TRADE

The projections on external trade assume significance in the light of the ongoing Red Sea crisis and the recent projections of current account deficit under 1% of GDP in FY24.

• Merchandise exports (export of physical goods) is projected to grow by 3.3% in dollar terms in FY25 while the merchandise imports are likely to grow 4.8% in FY25. The next year is likely to see a recovery in overall trade, against the contraction in FY24.
• What about FY26? That looks a lot more positive with merchandise exports and merchandise imports likely to grow by 6.2% and 7.5% respectively on a yoy basis. This is just merchandise trade, and does not include the services trade story.
• Finally, on the subject of the current account deficit (CAD), it is projected 30 bps lower at 1.0% of GDP in FY24 and is likely to widen by 20 basis points to 1.2% of GDP in FY25 and then taper to 1.1% of GDP in FY26. That is likely to be largely driven by services surplus.

It looks like the lag effect of the global weakness and the Red Sea crisis is unlikely to last beyond FY24. However, the positive takeaway is that services trade surplus will more than make up for the shortfall.