RBI SURVEYS

Context

Key points

• The RBI routinely conducts surveys to assess the health of the economy, while business sentiment remains upbeat even as capacity utilisation keeps rising, consumer confidence remains a worry.
• RBI expects inflation to be 6.7 per cent for the current financial year, and most analysts expect the repo rate to rise to the 6 per cent level by the end of the year.

Implications

• Since the repo rate is the base interest rate, a hike will lead to borrowing rates of all kinds going up by the same degree or more.
• Consumers will have to shell out more as EMIs for their home and car loans.
• Producers will have to pay more to borrow money for new investments. In other words, this will create a drag on India's economic recovery.

The state of India's economic recovery

• The RBI expects India's GDP to grow by 7.2 per cent in 2022-23.
• To understand how the different components of the economy are doing, the RBI routinely conducts surveys.
• Last week, the RBI released seven such surveys. 

1. Consumer Confidence Survey (CCS)

1. The current situation Index (CSI) and
2. the Future Expectations Index (FEI).

• An index below the 100 mark implies people are pessimistic and a value higher than 100 conveys optimism.
• As the CCS chart shows, the CSI (Red dotted line) has been recovering but, despite the improvement, it is still in the negative territory.
• The FEI is in positive territory, but even now it stays below the pre-pandemic levels.
• In short, consumer confidence is improving but there is still some way to go for people to recover from the Covid shock.

2. Inflation Expectations Survey (IES)

• This survey tracks people's expectations of inflation.
• The biggest worry during phases of rapid inflation is that if inflation is not controlled quickly, it can lead to people getting into the habit of expecting high inflation; that in turn, alters people's economic behaviour.
• Often central bankers can be found saying they want to prevent people's inflation expectations from becoming "Unanchored".
• This survey provides an answer to whether that is happening in India or not.
• The Survey found that households' inflation perception for the current period has moderated by 80 bps to 9.3 per cent in the latest survey round.
• "Their three months and one-year ahead median inflation expectations also declined by 50 bps and 60 bps, respectively, from the May 2022 round of the Survey," finds the RBI.
• In short, even though inflation is high at present, people expect it to come down soon.

3. OBICUS Survey

• Order Books Inventories and Capacity Utilisation Survey covered 765 manufacturing companies to provide a snapshot of demand conditions in India's manufacturing sector from January to March 2022.
• The Key variable here is Capacity Utilisation (CU). A low level of CU implies that manufacturing firms can meet the existing demand without needing to boost production.
• In turn, has negative implications for job creation and the chances for private sector investments in the economy.
• Here again, the news is heartening. The CU is well above, the Pre-pandemic level suggesting India's aggregate demand is recovering steadily.

4. Industrial Outlook Survey (IOS)

• Just like the CCS tries to suss out consumer confidence, this survey tries to track the sentiments of businessmen and businesswomen.
• The survey encapsulates a qualitative assessment of the business climate by Indian manufacturing companies for Q1:2022-23 (April, May and June) and their expectations for Q2: 2022-23 (July, August and September).
• As the second chart shows, businesses were optimistic (Above the 100 level) in Q1, although not as much as they were in the recent past.
• But, they do expect things to improve as the months roll by.
• This tallies with the steadily improving capacity utilisation from the OBICUS.
• In short, Unlike consumer confidence, business sentiments are already in the optimistic terrain and are expected to improve further.

5. Services and Infrastructure Outlook Survey (SIOS)

• Again, Much like the CCS and IOS above, this survey does a qualitative assessment of how over 750 Indian Companies in the services and infrastructure sectors view the current situation (Q1) and the future prospects (Q2).
• The questions are on parameters relating to demand conditions, price situations and other business conditions.
• The survey found that the companies in the services space are far more optimistic than companies in the infrastructure sector.
• The key takeaway from this survey is that the net responses to the difference between the percentage of respondents reporting optimism and those reporting pessimism are positive for both sectors.

6. Bank Lending Survey (BLS)

• This survey captures the mood qualitative assessment and expectations of major scheduled commercial banks (SCBs) on credit parameters (Viz., loan demand and terms and conditions of loans) for major economic sectors.
• The BLS found that the banker's assessment of loan demand in Q1: 2022-23 remained positive for all major sectors though the sentiments were somewhat toned down from the level reported in the previous quarter.
• Sentiments on overall loan demand in the second, third and fourth quarters also remained upbeat.
• In short, while banks remain upbeat, they are not as optimistic as they were just a couple of quarters ago.

7. Survey of Professional Forecasters (SPF)

• There is a survey of 42 professional forecasters (Outside the RBI) on key macroeconomic indicators such as GDP growth rate and inflation rate in the current year and the next financial year.
• India's real GDP is expected to grow by 7.1 per cent in 2022-23.
• Projections revised down by 10 basis points from the last survey round and it is expected to grow by 6.3 per cent in 2023-24.

Conclusion