New Delhi: Indian businesses expect inflation to taper off gradually over the next year, a survey by the Indian Institute of Management-Ahmedabad (IIM-A) has found — a development that follows the repo rate introduced by the RBI in May.
IIM-A’s Business Inflation Expectations Survey for May (BIES-May 2022), which was released Tuesday and was based on the responses from around 1,000 companies, found that businesses’ inflation expectations declined to 5.58 per cent in May, from 6.2 per cent in April this year.
The ‘BIES-May 2022’ — the 61st round of the survey — also shows that despite some optimism, companies expect their profits to be muted throughout the year because of high cost pressures and subdued sales.
Inflation expectation is the measure of what people — consumers, businesses, or investors — expect inflation to be in the future. Business inflation expectation, or BIE, is a year-ahead inflation projection that companies make in order to calculate their cost and sales target.
Businesses’ inflation expectations saw a sharp rise in November 2021 and peaked at over 6 per cent in February.
Prof. Abhiman Das, who teaches economics at the institute and leads the monthly exercise, said that the reason behind the optimism is the “monetary action plan” brought about by the RBI in the last two months.
“[It] has given them enough confidence that the central bank is serious about containing inflation within 6 per cent,” he told ThePrint over the phone. “The other reason is some moderation in crude oil price. This has led to firms believing that over the period of next one year the inflation will not remain unanchored as it was over the last four months.”
The IIM-A’s monthly survey holds significance as the RBI quotes it regularly as part of their monthly bulletins in order to understand the behaviour of businesses in the country. The survey seeks to examine the amount of slack (pace of economic growth) in the economy by polling a panel of business leaders about their inflation expectations in the short- and medium-term.
The survey includes questions about expectations on input costs over the next year and the factors influencing price changes — such as profit and sales levels.
As inflation soared this year, the RBI’s Monetary Policy Committee (MPC) raised the repurchase rate, known as the repo rate — the rate at which commercial banks borrow from the RBI — twice: First in May by 40 basis points and then in June by 50 basis points.
The RBI expects the annual inflation rate, measured through the Consumer Price Index (CPI), to average at 6.7 per cent throughout much of 2022-23 on the back of elevated global commodity prices. It expects it to drop below 6 per cent — the RBI’s upper tolerance band — only in the last quarter (January-March) of the financial year.
According to India’s Monetary Policy Framework, the RBI is mandated to maintain the CPI inflation at 4 per cent in the medium term but allows the flexibility of 2 percentage points on either side — called the tolerance band — to accommodate unforeseen shocks such as the Covid pandemic.
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Subdued sales and persisting cost pressures
The BIES-May 2022 survey shows that the percentage of firms reporting “somewhat less than normal” sales rose to 34 per cent in May against 27 per cent in April. Likewise, the number of companies that reported sales as being “about normal” dipped to 23 per cent in May from 28 per cent in April.
In addition, 80 per cent of the firms surveyed had been reporting “much less than or somewhat less than normal” profit for the last five rounds.
Over a third of the firms participating in the survey said their input costs had increased to over 6 per cent in the four months ending in May, while the rest said their costs had gone up over 10 per cent.
However, this appears to be an improvement from the survey undertaken in February, when respondents that their costs had gone up by 39 per cent in the preceding four months.
Das said the difference showed that companies were expecting the situation to improve.
“There are a number of respondents who, over the last 4 months, thought that their cost has increased more than 10 per cent. That means a large number of firms which were witnessing very high costs (of over 10 percent) are now moderating their expectations.”
New York-based financial and business analytics firm S&P Global’s Purchasing Managers’ Index (PMI) for June indicates that the price at which companies purchased goods and the price at which they sold their output retreated to a three-month low, but remained above their respective long-run averages — that is, between 3 and 5 years.
PMI is one of the most closely watched indicators of business activity, both in the manufacturing and the services sectors.
“Monitored firms reported increases for a wide range of inputs — including chemicals, electronics, energy, metals, and textiles — which they partly passed on to clients in the form of higher selling prices,” S&P Global said in their June report.
‘Anchoring food inflation’
In May, India’s inflation rate moderated to 7.04 per cent from a near 8-year high of 7.79 per cent in April, but the CPI inflation has stayed above the RBI’s tolerance band of 2-6 per cent for the fifth consecutive month (up until May). Moreover, food prices, which have almost 50 per cent weight in the index, also moderated to 8 per cent in May from 8.3 per cent in April.
According to various reports, prices of food items in India have increased by 70 per cent between January 2014 and March 2022.
Several factors like increased fuel and food prices, pandemic-induced supply shortage, the ongoing Russia-Ukraine war, and hiked interest rates by the US Federal Reserve had led to a global trend of economies witnessing inflation.
Das said India still had a chance to stop its inflation from reaching the levels seen globally. This, he added, could be done with better food management.
“India can be one exceptional country to escape the sustained global price surge. This may happen because of the way our CPI basket is designed, around 50 per cent of its weight is in the food category and prices of food commodities adjust much faster than other commodities in India,” Das said.
“So if by better food management the country can control its food prices then India can escape the kind of consumer price inflation that other countries are witnessing. If we are able to contain the inflation on food prices, then spill over onto other things like wage, other services, etc. will be limited,” he added.
With inputs from Shubham Batra
(Edited by Uttara Ramaswamy)
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