What we read in the RBI November Forward Looking Surveys

11 Dec 2023 , 07:14 AM

Gist of the RBI Forward Looking Surveys

Every alternate month, the RBI releases its forward looking surveys. For November 2023, the forward surveys released by the RBI cover consumer confidence, expectations on inflation and the survey of professional forecasters on macroeconomic indicators. Before we get into the specifics of the RBI forward looking surveys, it is essential to understand the macroeconomic backdrop to these surveys.

In the lates RBI policy for December 2023, the RBI has maintained status quo on rates at 6.5%, which was logical as there was not much that the RBI needed to do. However, while keeping the inflation expectations at 5.4% for FY24, the RBI has upped its GDP growth forecast for FY24 by 50 bps from 6.5% to 7.0%. This was necessitated by the GDP growth for Q2FY24 coming in much higher than expected at 7.6%. The market consensus estimate was 6.8% for GDP growth in Q2FY24. 

It is not just the GDP growth that has improved. Even consumer inflation has fallen from 7.44% in July 2023 to 4.87% in October 2023. The inflation reading for November is expected next week and it is likely to be around the 5% mark. In addition, the fiscal deficit for the year looks on target to stay within the budgetary constraint of 5.9%. The only possible area of concern is the current account deficit, which could spike on account of a spike in the trade deficit in the second half of FY24.

What does the RBI Consumer Confidence survey say?

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 as well as for the fate of a number of sectors in the consumer space. Here are some key takeaways from the consumer confidence survey.

• The current consumer confidence index stood at 92.2, the same level as the previous survey. This indicates that there is not much difference in the perception of the consumers with respect to confidence in the economy. 

   

• The higher level of pessimism on current general economic conditions was largely counter-balanced by a positive turnaround in sentiments pertaining to current income levels. People are generally more optimistic about income in real terms.

   

• In fact, household assessment of current income is at the highest level seen since July 2019, which was the pre-COVID period. Even the expectations of future income have improved further in this survey.

   

• So, how is the current consumer perception compared to the last survey in September 2023? Overall consumer confidence index is flat, but that glosses over the inner details. On income and spending, there are positive sentiments with improvement over the last survey. On price levels, there are still negative sentiments, but there is an improvement over the last survey. On economic situation and employment, the sentiments are negative with deterioration over the last survey.

   

• So, how is the one year ahead expectation compared to the last survey in September 2023? Overall, one-year ahead consumer confidence index shows positive sentiments but some deterioration over last survey. On income and spending, there are positive sentiments with improvement over the last survey. On price levels, there are still negative sentiments, with deterioration over the last survey. On the economic situation and employment, the sentiments are positive with deterioration over the last survey.

Consumer confidence is almost the same as last survey. However, there appears to be some critical areas of improvement seen in the forward looking surveys. For now, consumers look more optimistic about the future, albeit neutral about the present.

What does the RBI Inflation Expectations survey say?

Typically, the 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.

• The household perception on current inflation actually fell by 20 basis points (bps) from the previous September survey. The fall was from 8.4% to 8.2% and since the start of the current fiscal year, inflation expectations are lower by 70 bps from 8.9% to 8.2%. 

   

• Median inflation expectation remained stable for the three months ahead period at 9.1%. Here it must be noted that this is not comparable with the CPI inflation, since this is the inflation that the consumers are actually experiencing on household budgets. However, for the 1 year ahead period, the consumer inflation is up 20 bps at 10.1%. However, this is still lower compared to 10.5% at the start of the fiscal year.

   

• What this means is that a fairly large share of households expects higher inflation for both three months ahead as well as one year ahead. This could be due to the lag effect of food inflation that most people are facing in their household budgets.

   

• There is a broad takeaway that households expect some rise in price and inflationary pressures across major product groups for the year and this includes food basket, non-food basket, services, consumer durables and consumer non-durables.

   

• The most important determinants of overall inflation expectations are food products and services. That is why, the expectations regarding overall prices and inflation over the next three months are more aligned with those of food products and services. However, for the year ahead period, such alignment is more pronounced in the case of food products and housing segments.

The bottom line is that consumers do expect 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.

What the RBI survey of professional forecasters says on GDP growth?

This is a slightly more intense form of survey conducted by the RBI, wherein it touches base with professional forecasters on various facets of the economy to get a broad macro perspective. Most of these are median values, so the range also matters here.

• Let us start with the GDP growth. For FY24, the real GDP growth has been upgraded by 20 bps to 6.4% while the forecast for FY25 is held at 6.3%. This does look rather pessimistic compared to the RBI estimate of 7% growth for FY24. More so, considering that this survey was conducted after the MOSPI had released its GDP data for Q2FY24. 

   

• However, as we said before, it is not just the median GDP growth but even the range of growth forecasts that matter. In this case, the forecasts for FY24 growth in GDP range from 5.8% on the lower side to 7.4% on the upper side. 

   

• On the subject of the components of GDP growth, the RBI survey has pegged the annual growth in real private final consumption expenditure (PFCE) at 6.0%for FY24 while the annual growth in gross fixed capital formation for FY24 ahs been pegged at a more optimistic 7.5%, in the light of the aggressive capex by the government of India.

   

• The survey for November has also revised the real gross value added (GVA) up by 10 basis points at 6.2%. Rea GVA is the GDP growth shorn of the impact of indirect taxes and subsidies. GVA is normally considered to be a more reliable image of intrinsic growth happening in the economy.

Clearly, the RBI survey of professional forecasters is bullish on macroeconomic growth, although the median number appears to be off sync with the RBI projections.

What the RBI survey of professional forecasters says on Inflation?

The quick takeaway is that moderation in inflation is expected. This inflation is the expectations of CPI inflation by professional forecasters. This is not to be compared with the consumer perception inflation, which is more about household budget impact. Here are the key takeaways.

• The annual headline inflation, based on consumer price index (CPI), is expected at 5.4% for fiscal year FY24 and at 4.7% for FY25. The glide path is expected to be progressively lower. For instance, the headline CPI inflation is expected at 5.4% for Q3FY24 and subsequently it is expected to moderate to 5.2% over the next two quarters. Eventually, by end of FY25, the headline inflation is expected at a more reasonable level of 3.9%, which is well under the RBI stated target of 4%. 

   

• The core inflation reading, is the CPI inflation excluding food, beverages, pan, tobacco and intoxicants, fuel, and light. This is the structural story of inflation and tends to be sticky compared to food and fuel inflation, which are more cyclical in nature. The core inflation is expected at 4.3% in Q3, but it is expected to stay in the range of 4.1% to 4.4% over the next three quarters after that. 

The path of inflation is lower and this is likely to be led by core inflation. That is a more sustainable scenario since the cycles in food and fuel are not exactly in the control of the government of India.

What RBI survey of professional forecasters says on External Sector?

The government has been facing some stress amidst rising trade deficit on the merchandise account. That has larger ramifications for the current account deficit (CAD) and consequently for the value of the rupee. Here are some key takeaways from the professional survey on the external sector.

• Merchandise exports (export of physical goods) is projected to fall by -7.1% in US dollar terms in FY24 while the merchandise imports are likely to fall by -5.4% in the fiscal year FY24. The survey does not cover the trade in services, but this is where some of the traction is likely to come for the external account. 

   

• What about FY25, That looks like a positive year with merchandise exports and merchandise imports likely to grow by 5.0% and 6.2% 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 to be at 1.7% of GDP in FY24 and is likely to fall by 10 basis points to 1.6% of GDP in FY25. The current account is likely to get some favourable assistance from the positive outlook for services exports.

Merchandise trade overall has been low for different reasons. For instance, exports were lower due to weak demand globally amidst recession fears. That concern may have gone, but consumers will take some time to reconcile. The impact on the trade balance was not too deep since imports had also fallen in sync. The big question that forecasters need to answer is how the trade picture gets impacted by the services exports in the next two years. With growth fears receding in the US, one cannot rule out the return of tech spending by US corporates. That will be a positive boost for the CAD in India.