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6 things to read in RBI’s forward looking surveys
The Reserve Bank of India sets India's monetary policy, which has a direct impact on growth as well as people's pockets. However, to ensure a correct policy, the RBI needs to know the ground-reality. Has inflation really reduced for the common man? Are companies seeing an increase in production and orders? Are people optimistic about the prospects of future income? Answers to these are important factors in the RBI's policy decisions.
This is why every quarter, the RBI conducts surveys covering different topics like industrial production, order books, inflation expectations, consumer confidence and overall economic growth.
Here is a look at the key findings from the recent survey results:
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Inflation is still a problem:
Over 80% of respondents expect a price rise in the current as well as future. In fact, the number of people expecting a rise in prices has actually increased. This includes essential items too. "More than 87% respondents reported increase for the current as well as future period," the RBI survey said. This comes surprising at a time when retail inflation has moderated to 5% levels, while producer-side prices actually declined for the past many months.
What it means: Despite inflation data moderating, people have not witnessed any real drop in prices. If the RBI perceives no real change in the ground reality with respect to inflation, it may hesitate to cut interest rates going forward.
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Consumers expect less income:
The number of respondents expecting a rise in income fell in the current survey. "The positive perceptions regarding current income appear to be declining from September 2014 onwards," the RBI's Consumer Confidence survey suggested.
What it means: Usually, when consumers expect no rise in income, they tighten their purse strings. This is especially so if they also expect prices to rise. Any cut in spending has a direct impact on company sales and profitability. This, in turn, has a say in overall economic growth.
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Companies are not too optimistic:
"Lower level of optimism is observed in the major parameters such as production, order books, capacity utilisation, employment, financial situation, availability of finance along with increased pessimism in raw material cost and profit margin," the RBI Industrial Outlook survey said. This is for the first two quarters of FY16 ending October.
What it means: Companies plan for expansion only when they are optimistic about the future. Any fall in optimism could lead to lower investments, and eventually, lower economic growth.
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Capacity under-utilised:
Companies used only 75.2% of their total capacities like factories and other assets in the January-March 2015 quarter. This is slightly higher than the 72.6% in the previous quarter. However, it is still lower than the 78% in the previous year. Even in comparison with demand for goods, 92% of the companies surveyed indicated that they have enough, if not extra, capacities.
What it means: If you have one mixer or oven which is not fully utilised, would you buy another? No, you wouldn't. Exactly the same way, companies do not plan new investments if their existing capacities are not fully utilised.
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Inventory levels rising:
Companies produce goods well in advance. These unsold goods are called inventory. Rise in inventory levels in itself may not be a bad thing. This is why it is compared with the sales figures. The finished goods inventory to sales ratio rose to 19.4% in the March 2015 quarter from the previous year. If you take into account both finished and unfinished goods, then the inventory to sales ratio stood at 51.7%. This means companies held inventory worth about half the amount of goods sold.
What it means: A rise in inventory to sales ratio means that companies are producing more goods than sales. This could affect profits; after all, the company is spending more producing goods. It also reflects that companies are not facing as high demands as they originally expected.
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Poor investment demand:
Only 45.7% of the companies surveyed plan to invest in the current fiscal year. This is much lower than 49% in FY15 and 65% in the year before. However, if you look at the final investment figures, around 53% companies actually invested in FY15. This shows some times, even when companies do not plan, they could eventually invest.
What it means: Investments are a key factor of economic growth. The Indian economy slowed because companies stopped investing. A fall in planned investments shows that companies are facing poor demand in the country.
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7.6%
Forecasters expect a 7.6% growth in the current fiscal year ending March 2016, as per the RBI's survey. This is 0.2% lower than original expectations. This is mainly because they expect agriculture to grow a 0.2% slower at 2%. The industry and services segments are expected to grow faster at 6.5% and 9.7% respectively.
