What we read from the RBI forward looking Surveys Jan-25

12 Feb 2025 , 01:44 PM

The latest RBI forward looking survey for January 2025, published by the RBI in early February 2025, has some interesting insights about how consumer confidence and inflation expectations continue to be cautious, despite sedate macro numbers.

• CONSUMER CONFIDENCE SURVEY SHOWS A SLIGHT DIP

The consumer confidence survey of the RBI looks at current consumer confidence vis-à-vis one-year ago; as well as the one-year ahead expected consumer confidence, compared to the current levels. Compared to the year-ago period, the consumer confidence has tapered across most of the parameters like economic situation, employment, and income levels. However, spending sentiments remain positive while price sentiments are showing signs of improvement, despite being negative.

What about the one year ahead consumer confidence compared to today. Apparently, the consumer confidence of the future still appears to be slightly shaky. For instance, price level expectations are negative and also deteriorated compared to last survey. On other parameters like economic situation, employment, income and spending, the trend is still positive, but has deteriorated compared to the previous survey.

• INFLATION EXPECTATIONS FOR 2025 ON THE HIGHER SIDE

The survey presents the inflation expectations based on 3-month forward inflation and 1-year forward inflation. Even though the current inflation is down 10 bps on account of lower food prices, the 3 month forward inflation expectation has gone up by 20 bps while the 1-year forward inflation is up by 10 bps. In short,  a greater number of households in India are expecting the prices to go up in the near term and the medium term. This is household inflation so it is more reflective of family budgets. This inflation expectation number can be at divergence with the CPI inflation.

• OBICUS MANUFACTURING SURVEY SHOWS DEMAND PRESSURES

The survey of manufacturing published based on the data for Q2-FY25, for the period ending September 2024, has shown a sequential fall in seasonally adjusted capacity utilization in manufacturing. The utilization percentage in Q2 stands at 74.7%, compared to 75.8% in the first quarter. However, if one looks at the last five quarters up to September 2024, the seasonally adjusted capacity utilization has hovered between 74% and 76%.

For the second quarter ended September 2024, the flow of new orders was sharply lower on a you basis and also on QOQ basis. For instance, yoy growth in new order flows fell from 12.3% to 4.1% sequentially. Even if you look at sequential growth, the new orders flows are down from 10% in the fourth quarter of FY24. What about the inventory to sales ratio. For Q2F25, the finished goods inventory to total sales has fallen to 26.0%, the lowest level in the last 5 quarters. All the 3 key manufacturing parameters of capacity utilization, new order flows, and inventory ratio have fallen, showing demand pressure on manufacturing.

• MANUFACTURING OUTLOOK FOR Q3 AND Q4 OF FISCAL FY25

Broadly,  there appears to be a positive outlook for the manufacturing sector in Q3 and Q4, although the input costs are expected to also rise. That could be a push for input costs and could indirectly get built into cost-push inflation too. For Q3, the assessment is that key manufacturing parameters like production, employment, capacity utilization, order books, and exports. However, input costs are likely to face pressure in Q3.

What about the outlook for Q4FY25. On the other macros, the data is expected to be positive for production, capacity utilization, inventories, an exports. However, the input costs are likely to see sustained pressure, although salary costs could come down in January 2025. Even the pace of price hikes is likely to slow down impacting the operating margins.

• PROFESSIONAL FORECASTERS PAINT A POSITIVE PICTURE

Every alternate month, the RBI forward looking survey, also includes the survey of professional forecasters in the area of GDP growth, inflation, and current account deficit. Here are some of the key findings.

• Professional forecasters are cautious about GDP growth. While the GDP growth estimate for FY25 has been placed at 6.3%, the growth for FY26 is placed at 6.5%. This is sharply lower than previous years. Weak demand is likely to hit output across sectors. Between FY25 and FY26; manufacturing is likely to improve and services are likely to be flat. However, agricultural growth is likely to come under pressure.
• As per the professional forecasts, CPI inflation is pegged at 4.8% in FY25 and at 4.3% in FY26. Most of the pressure on inflation in the next 2 years is expected from core inflation, even as food inflation is likely to be under control.
• On the external sector, merchandise exports is expected to grow at 1.3% in FY25 and 4.1% in FY26, while merchandise imports are targeted to grow at 5.0% and 4.5% respectively. The current account deficit (CAD) is expected to remain static at 1.1% of GDP for FY25 and FY26 also.

Let us finally turn to the bank lending survey.

• BANK LENDING SURVEY THROWS A MIXED PICTURE

Finally, the bank lending survey provides an assessment of banking lending for Q3FY25 and expectations for the next 3 quarters. Bank lending is expected to have grown across all sectors in Q3FY25, although the growth in retail loans and personal loans may have tapered. This caution in the consumer lending is likely to persist in Q4FY25 also. However, Q1 and Q2 of FY26 are expected to see cyclical moderation in credit growth across manufacturing sectors. However, that should improve in the subsequent quarters as the normal upcycle for loans resumes.

Overall, the macros are still robust For FY25 and FY26. However, due to higher inflation expectations next year, the consumer sentiments on the economy are down!