‘Q2 manufacturing expectations drop’

RBI’s June Industrial Outlook Survey points to adverse economic conditions: Bhide in MPC’s minutes

Early results from the RBI’s June Industrial Outlook Survey show that not only has the summary index of current business conditions for the manufacturing sector dropped for the current quarter, but also that the index of expectations for the second quarter of FY2022 has declined, as per observations made by Shashanka Bhide, member of the RBI’s Monetary Policy Committee, at the MPC meeting earlier this month. The RBI on Friday released the minutes of the meeting.

“These perceptions of business conditions point to the adverse economic conditions compared to the sentiments at the end of Q4: FY2021,” Dr. Bhide noted.

He said while the data on the impact of the second wave of the COVID-19 pandemic was limited, qualitative data from the surveys of households and enterprises suggest ‘significant dent’ in consumer and business sentiment. “The survey of Consumer Confidence conducted by RBI in the last week of April and up to May 10, in 13 major cities… reveals a sharp rise in the percentage of respondents who perceive the current general economic conditions to be worse than a year back, compared to a similar survey conducted two months back,” he added.

Importantly, 51.5% of the respondents opined that economic conditions would be worse a year ahead.

Observing that the economy’s recovery would hinge on the decline in the spread of the disease, he said, “acceleration in the vaccination program and availability of health care would be a key to boost the confidence of the consumers, workers and producers in the resumption of their economic lives”.

Ashima Goyal, another member, cautioned against laying too much store by the latest round of the RBI’s surveys, noting that these were conducted during a “period of highest fear and uncertainty that very likely affected consumer responses” given that the number of fresh cases peaked on May 7. “Robust inferences have to await surveys taken in more normal times,” she suggested.

‘Forecasts less reliable’

Dr. Goyal also noted that the MPC had moved to data-based guidance, given that expectations and forecasts were less reliable in times of ‘such uncertainty’, a view echoed by fellow member Jayanth R. Varma.

Prof. Varma said the MPC must be sensitive to the risk that inflation expectations could become entrenched if inflation remains elevated for too long.

“Ever since the onset of the pandemic, nowcasts and forecasts of economic growth have not been highly reliable,” Prof. Varma added.

He said Indian inflation rates have been consistently well above the mid point of the tolerance zone for an extended period and would remain elevated for some time.

“Moreover, survey data and other indicators show that businesses have no difficulty in passing on cost increases to consumers, and are able to maintain (and even expand) their margins. The only source of comfort is that all the evidence at the moment suggests that inflation is being driven not by domestic demand, but by supply side factors including the global surge in commodity prices,” he said.

This could change as the recovery gathers steam, and the MPC must be sensitive to the risk that inflation expectations could become entrenched if inflation remains elevated for too long, he added.

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