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

10 Oct 2024 , 09:48 AM

RBI SEPTEMBER FORWARD LOOKING SURVEYS SHOW SMALL REVIVAL

Every alternate month the RBI releases these forward looking surveys across key macro variables like consumer confidence, inflation expectations, manufacturing activity, banking variables, and professional expectations on key macroeconomic variables. The last August 2024 forwards looking survey had covered data pertaining to the month of July 2024. The latest forward looking survey published in October 2024, presents the expectations as of September 2024. The latest survey come at a time when the real GDP growth for Q1FY25 has fallen to 6.7% from 8.2% in FY24. However, the fall in the real GDP growth was more due to higher inflation, since nominal GDP growth was actually higher. In addition, the current account deficit for Q1FY25 had come in marginally higher at -1.1%, compared to a current account surplus of 0.5% in the fourth quarter of FY24.

During this period, the geopolitical risk in Middle East and West Asia escalated with Iran and Israel getting closer to an all-out war. There are now two distinct risks. Firstly, Israel could bombard the oil installations of Iran’s NIOC, which could severely impact oil supply and spike prices. Secondly, Iran could well order a blockade of the Straits of Hormuz, which will not only impact the oil supply but also the trade in other goods. Amidst the volatile geopolitics of the region, the US Fed has taken the initiative to cut rates by 50 basis points. In addition, the US Fed will be cutting rates by another 50 bps by December 2024 and an additional 100 bps by December 2025, taking the total rate cuts from the peak to 200 basis points. These are likely to add to the pressure on the Indian policymakers too.

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. In addition, 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 September 2024 and how it compares with the July 2024 survey.

• The current consumer confidence index bounced back after falling for two consecutive surveys of May 2024 and July 2024. However, the bounce was marginal. Consumer confidence current situation index bounced from 93.9 to a level of 94.7 as compared to the previous survey of July 2024. This is a small bounce after the very sharp fall in consumer confidence in the previous July survey. The previous fall could be attributed to a combination of the political situation being in a state of electoral flux, and the global geopolitical risks in West Asia. The geopolitical risks are still there, but political risks are now relegated to the background for another 5 years.
• What about the one-year ahead expectations. The one year forward expectations also showed a bounce to 121.4 in September 2024, compared to 120.7 in July 2024. The peak survey level of 125.2 in March 2024 was higher than pre-COVID levels. Despite the bounce in September, it is still well below the yearly peak of March 2024.
• Let us now turn to the break-up of the current perception compared to one year ago. At 94.7 versus 93.9, it is a sign of consumer confidence sentiments in September 2024 showing positive tidings; albeit still being in pessimism zone. What were the triggers for this shift. On most parameters, the sentiments were still negative, despite an improvement compared to July 2024. Current perception of the economic situation, jobs, income, and inflation has improved but sentiments remained negative. The only positive signal comes from spending, which not only witnessed positive sentiments, but also saw an improvement over July 2024.
• Let us finally turn to the one-year ahead expectation for September 2024 compared to the last survey in July 2024? Overall, one-year ahead consumer confidence index bounced from 120.7 to 121.4; with improved combined with overall positive sentiments on the one-year ahead data. Among the 5 key components of the one-year ahead expectations in the consumer survey; only inflation showed negative sentiments despite the improvement over July 2024. This could be due to the likely impact of the West Asia risks. However, in the case of economic situation, jobs, income, and spending; there was positive shift over July combined with positive sentiments in one-year ahead sentiments.

The moral of the story from the Consumer confidence survey is that the overall consumer confidence picture still looks very positive on a long term basis. The last two surveys in May and July 2024 had shown negative cues, but that appears to have been overcome in the September survey. The good news is that the short term sentiments on spending are high, which bodes well for consumer demand and growth.

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. This is over and above the current perspective. The RBI not only manages price stability but also the inflation expectations, as it has a profound impact on how consumers behave, spend, save, and invest. Here is our quick reading on inflation expectations survey.

• Inflation expectations in September 2024 survey are marginally lower in terms of current inflation, 3-month ahead inflation and 1-year ahead inflation. The household current inflation perception for September 2024 is down 10 bps at 8.1%, compared to 8.2% in July 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. This is the actual inflation that households experience in their family budgets.
• Let us first look at the findings of the 3-month ahead survey of inflation expectations. It may be recollected that between March 2024 and July 2024, the 3-month ahead inflation expectations had gone up from 9.0% to 9.4%. For the month of September 2024, 3-month ahead inflation expectation has come down by 20 bps from 9.4% to 9.2%. In short, the consumer expectations of 3-month ahead inflation has come down by 20-bps after the spike in the previous two surveys. That could be more because people are not feeling any impact of the geopolitical risk. One factor in the previous quarters was the higher mobile tariffs being charged by most of the telecom companies to boost ARPUs.
• Let us now turn to the findings of the 1-year ahead survey of inflation expectations. It may be recollected that between March 2024 and July 2024, the 1-year ahead inflation expectations had already gone up by 30 bps from 9.8% to 10.1%. For the month of September 2024, the 1-year ahead inflation expectation has marginally toned down by 10 bps from 10.1% to 10.0%; which is still quite high by anecdotal standards. It also shows that the consumer are broadly preparing themselves mentally for higher inflation in the next one year due to the spillover impact of the geopolitical risks. Another factor that has toned down the inflation expectation is that the monsoons have been 107% of the long period average (LPA), which is likely to favour expectations of tempered prices.

It appears that inflation concerns have not gone away and people are generally still preparing themselves mentally for persistent higher inflation in the next one year. However, the marginal toning down of inflation also shows that most people are realizing that they had, probably, overestimate the impact of the geopolitical risks.

SURVEY ON MANUFACTURING FOR Q1FY25

In the July 2024 survey of Q4FY24 manufacturing, the capacity utilization of industry had spiked from 74.7% to 76.8%, which was the highest level in the last 10 years. How do the numbers look for Q1FY25?

• Aggregate level manufacturing capacity utilization has come down from 76.8% in Q4FY24 to 74.0% in Q1FY25. This can be attributed to a quarter dominated by electoral uncertainty. However, in this same period, the seasonally adjusted capacity utilization (CU-SA) had gone up by 120 bps from 74.6% to 75.8%. That is more comparable.
• New orders received by manufacturing in Q1FY25 has gone up in yoy terms, but it is lower on a sequential basis. This is largely on account of the limited capex spending by private sector, due to the full budget holding the capex growth at just 11.1%, in contrast to 30% growth in capex in the previous two years.
• Let us turn to the inventory ratios. If you compare the period Q1FY25 with Q4FY24, then the ratio of finished goods inventory to sales as well as the ratio of raw material inventory to sales have been more or less stable.

The manufacturing survey broadly shows that the positive sentiments triggered by government infrastructure spending have taken a back-seat as most of the private sector companies are re-examining their capex plans. This is amidst limited government capex and higher interest rates in the economy.

RBI FORWARD LOOKING SURVEY – PROFESSIONAL FORECASTS ON INFLATION

While consumer surveys are based on household budget experiences, they lack the finesse of professional expectations backed by data and advanced analytical techniques. That is where professional forecasters come in; with their 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 4.4% for FY26 also. This is in line with what the RBI has projected in October monetary policy.
• In terms of the immediate trajectory of inflation, the yoy inflation is expected at 4.0% in the Q2FY25 but likely to stabilize in the range of 4.2%-4.6% in the subsequent quarters. This spike is expected due to core inflate and geopolitical risks; but risks are diffused.
• CPI inflation, excluding food and beverages, pan, tobacco and intoxicants, and fuel and light (approximating to core inflation), is expected at 3.5% in Q2FY25. However, over the 3 following quarters, the core inflation is expected to spike to 3.9%, 4.2% and 4.3% respectively. With the supply chains stabilizing and the dividends over, the core inflation looks the most vulnerable part of the inflation basket.

What the professional forecasters expect is that most of the pressure on inflation in the coming quarters will come from core inflation; although fuel inflation could be the joker in the pack if the situation in West Asia prolongs. Since core inflation is sticky, it does raise question on whether RBI can defend the 4% inflation target.

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 expectation has been lowered by 10 bps to 6.9% for FY25, and to 6.7% for FY26. The RBI monetary policy has held its FY25 GDP growth forecast at 7.2%. Of course, even among the professional forecasters, the range of estimates is fairly wide between 6.0% and 8.1%; hence any median figure must be taken with a pinch of salt.
• The annual growth in real private final consumption expenditure (PFCE) and real gross fixed capital formation (GFCF) for FY25 are pegged at 6.5% (50 bps higher) and 7.9% (10 bps lower) respectively. Apparently, the GFCG estimates have been lowered by 70 bps in the last two surveys after the budget cut capex allocation growth from 30% in FY23 and FY24 to 11% in FY25. The FY26 figures are likely to be stable.

For FY25 and FY26, the GDP growth is likely to be driven by consumption triggers and capex triggers. It is just that, there are concerns over the capex triggers in recent months after the Union Budget opted to use the RBI bumper dividend for controlling fiscal deficit rather than to boost the capex in FY25.

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 1.1% of GDP in Q1FY25. Here are key takeaways.

• Merchandise exports (export of physical goods) is projected to grow by 3.4% in dollar terms in FY25 while the merchandise imports are likely to grow 4.6% in FY25. Amidst the trade constraints, growth in exports and imports have been lowered.
• What about FY26? That still looks positive with merchandise exports and merchandise imports likely to grow by 5.5% and 5.9% respectively on a yoy basis. There is a clear upgrade on export growth and import growth in FY26.
• Finally, on the subject of the current account deficit (CAD), it is projected at 1.0% of GDP in FY25. However, this could change in each survey based on trade data inputs. The FY26 current account deficit is likely to be flat at 1.0% 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, CAD can be tempered.

PARTING THOUGHTS ON BANK LENDING SURVEY FOR Q2FY25

The latest RBI Forward Looking Survey for September 2024 also covers the bank lending for the second quarter of FY25. For Q2FY25, the assessment is that there was a sharp bounce in loan demand across major sectors. In terms of expectations for Q3FY25, bankers are optimistic about loan demand growth across sectors, except mining and quarrying. Personal and consumer loans are likely show a bounce after two quarters of tepid data. In Q3 and Q4, bankers appear a lot more upbeat about loan demand across all sectors.

Overall, the picture presented by the survey is one of optimism at a producer level, although there is still some caution at the consumer level. However, things could change at short notice as the world navigates tough macro conditions.