What we read in the RBI January 2024 Forward Looking Surveys

12 Feb 2024 , 03:22 PM

Background to the RBI Forward Looking Surveys

Every second month, the RBI releases its forward looking surveys. For January 2024, the RBI has just released its comprehensive forward looking surveys. This survey covers consumer confidence, expectations on inflation and the survey of professional forecasters on macroeconomic indicators. There is also the OBICUS survey on manufacturing and the industrial outlook survey that is part of the RBI surveys this time. Firstly, let us look at the macroeconomic backdrop to these surveys.

In the latest RBI policy for February 2024, the RBI has maintained status quo on rates at 6.5%, even as the stance of the policy has been held as “gradual withdrawal of accommodation.” The expected GDP growth and inflation for FY24 has been retained as before. But, the RBI has provided a note of confidence by pegging the FY25 GDP growth at above 7% and the FY25 inflation at 4.5%. While the GDP has been robust, the latest interim budget also provided a fillip by cutting the fiscal deficit targets for FY25 to 5.1%. 

The one area of concern at a macro level is the evolving crisis in the Red Sea. The persistent attacks on cargo ships by Houthi rebels is forcing cargos to take the Horn of African route. This is not only adding to the time lag, but also adding to the freight costs and the insurance premium costs. The impact of this shift is already felt in oil prices as it rallied to above $82/bbl last week.

What the RBI Consumer Confidence survey says

The first part of the RBI forward looking surveys is the consumer confidence survey, which 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 January 2024 has increased to 95.1 from a level of 92.2 in November 2023. This indicates a substantial improvement in the consumer confidence levels over the previous year.

   

• What about the one-year ahead expectations. The one year forward expectations have also moved up to 123.1 in January 2024, compared to 120.6 in November 2023. Interestingly, the level of 123.1 is not only higher than the consumer confidence in pre-COVID India, but it is also the highest level ever and represents a new peak.

   

• Let us now turn to the break-up of the current perception compared to one year ago. At 95.1 versus 92.2, it is a sign of consumer confidence sentiments still being negative, but improving over last year. Let us focus on the triggers for this shift. The current perception of economic situation, employment and price level is still in the negative, but has improved smartly over the last survey in November. However, in terms of income and spending, the sentiments are positive but there is a sign of deterioration in the sentiments in the current survey.

   

• So, how are the one year ahead expectation in January 2024 compared to the last survey in November 2023? Overall, one-year ahead consumer confidence index shows positive sentiments and an improvement over the last survey from 120.6 to 123.1. On the economic situation and employment, the perception of one year ahead period is positive and has also improved over the November survey. The expectation of price level continues to be in the negative but sentiments have improved. However, in the case of income and spending, the sentiments are still positive, but there is deterioration over the previous survey of November 2023.

Consumer confidence is sharply higher over the last survey, both in terms of current status and future perception. There is improvement across most parameters. What stands out is that the consumer confidence index on a one-year forwards basis is at a peak level.

What the RBI Inflation Expectations survey says

RBI evaluates inflation expectations based on 3 months ahead data and 1-year ahead data. Here are some of the key finding from the survey.

• Inflation expectations are lowering. In fact, the household current inflation perception has fallen by 10 basis points compared to the November 2023 survey from 8.2% to 8.1%. This is the consumer inflation as experienced by the consumers and not the CPI inflation that the MOSPI reports.

   

• Short term inflation expectations are actually higher. For instance, the median inflation expectation for the 3-months ahead period has increased by 10 bps to 9.2%. This could be largely impacted by the immediate risks to inflation emanating from the Red Sea crisis, and the food price pressure. However, the inflation expectation from a 1-year perspective has moved up by 10 bps to 10.0%. 

   

• There is a clear dichotomy here. A higher share of respondents sees a rise in inflation in the near term but, over a one-year period, they expect the inflation to moderate as compared to the previous survey. As stated earlier, this dichotomy could be due to the higher short term risks perceived from the Kharif season and the Red Sea crisis. The election may also be playing a part in short term inflation perceptions. 

   

• 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 be acute in the coming 2 months. This is largely shaped by the kind of inflation that households are experiencing on the household budgets at this point of time. 

The crux of the matter is that consumers are certainly expecting higher inflation in the coming months. This is clearly driven by the kind of budgetary pressures that households are facing in terms of their family budgets; as well as immediate concerns over the Red Sea crisis and the election period. However, longer term expectations are relatively sober.

RBI survey of manufacturing sector capacity utilization

This is a fairly interesting survey which captures the industry sample observations on the capacity utilization and output of the manufacturing sector. The survey also collects data on the outlook for raw material and finished goods inventories of manufacturing sector. Here are some key takeaways.

• At the aggregate level, the capacity utilisation (CU) in the manufacturing sector has increased in the second quarter of FY24 ended September 2023 from 73.6% to 74.0%. It may be recollected that the capacity utilization had dipped to around 45% at the peak of the COVID crisis, but has since recovered and is back to normal levels. With capex rising, one can expect much greater capacity utilization, with industries like cement showing a sharp improvement in the capacity utilization levels.

   

• Manufacturers reported higher new orders in the second quarter of FY24 as compared to the previous quarter. The yoy growth in new orders and the qoq growth in the new orders were positive. Compared to the first quarter, there has been a sharp turnaround in pending orders, backlog orders and new orders of manufacturing sector.

   

• The raw material inventory (RMI) to sales ratio increased marginally in the second quarter compared to the previous quarter, while the finished goods inventory (FGI) to sales ratio remained stable. Let us look at some numbers. 

   

• In the previous quarter (Q1), the total inventory to sales ratio stood at 45.94%. Among the components of total inventory, the ratio of finished goods inventory to sales stood at 19.51%; WIP inventory to sales stood at 5.40% and raw material inventory ratio stood at 21.02%.

   

• In the latest quarter (Q2), the total inventory to sales ratio stood at 55.70%. Among the components of total inventory, the ratio of finished goods inventory to sales stood at 20.77%; WIP inventory to sales stood at 11.03% and raw material inventory ratio stood at 23.91%. While the growth in the ratio has been across the board, the biggest boost came from the ratio of work in progress (WIP) inventory to sales.

The survey clearly underlines that even as the capacity utilization has improved, there is improved business confidence in terms of the inventory ratios.

RBI survey of professional forecasters 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 some of the key takeaways on inflation forecasts.

• As per the survey of professional forecasters, the annual headline inflation, based on consumer price index is being projected at 5.4% for FY24 and at 4.6% for the next fiscal year FY25. 

   

• In terms of the immediate trajectory of inflation, the yoy inflation is expected at 5.2% in the fourth quarter and is likely to moderate thereafter. Headline inflation forecast path has broadly remained aligned to previous surveys.

   

• CPI inflation, excluding food and beverages, pan, tobacco and intoxicants, and fuel and light (approximating to core inflation), is expected at 3.7% in the next two quarters but likely to move up to 3.9% and to 4.3% after that. Clearly, they are expecting some sustained supply chain constraints created by the Red Sea crisis.

The path of inflation is lower but core inflation is likely to head higher. This is in contrast to the previous occasion. Most of the inflation gains in the coming quarters are likely to come from food and fuel, with core inflation gains having almost saturated.

RBI survey of professional forecasters on GDP Growth?

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 7.0% in FY24, while the GDP growth in FY25 is now pegged at 6.5%. However, it must be remembered that in the latest monetary policy, the RBI had pegged the FY25 growth at 7%.

   

• The annual growth in real private final consumption expenditure (PFCE) and real gross fixed capital formation (GFCF) for FY25 are pegged at 6.1% and 8.1% respectively, hinting at a sharp revival in the capital investment cycle in India. The real gross value added (GVA), which is the GDP growth excluding indirect taxes and subsidies, is likely to grow in FY25 at 6.3%. 

Growth story has been upgraded across GDP and GVA and that is likely to reflect on the overall macro numbers too.

RBI survey of professional forecasters on External Sector

The projections on external trade assume significance in the light of the ongoing Red Sea crisis and the prospects of a hit on exports and an impact on imported inflation. Here are some takeaways.

• Merchandise exports (export of physical goods) is projected to fall by -5.6% in US dollar terms in FY24 while the merchandise imports are likely to fall by -5.4% in the fiscal year FY24. The estimated fall in exports for FY24 is lower than in the November survey, but the import contraction is the same.

   

• What about FY25, That looks like a positive year with merchandise exports and merchandise imports likely to grow by 3.6% and 5.2% respectively on a yoy basis. In FY25, there is greater traction expected on the services trade front.

   

• Finally, on the subject of the current account deficit (CAD), it is projected at 1.3% of GDP in FY24 and is likely to widen by 10 basis points to 1.4% of GDP in FY25. The current account is likely to get some favourable assistance from services exports. The CAD for FY24 is sharply lower compared to the November estimates.

Merchandise trade overall has been hit by weak demand and the Red Sea crisis has only worsened the situation this year. The lag effect is expected to sustain for some time. However, good news is that the services trade is likely to sharply reduce the current account deficit (CAD) for FY24. That is the good news!