Businesses expect inflation below 5% but uncertainty a cause for worry

The expectations were as high as 6.12 percent in March.

Though the drop in inflation expectations will be music to the ears of policymakers, it was not all good news. According to IIM-A's survey, uncertainty over businesses' inflation expectations increased sharply in September.

While anchoring inflation expectations is critical to ensuring price stability—they are a key input in the formulation of monetary policy—it is difficult to measure them.

The IIM-A's BIES is one of the only two surveys conducted in India to measure inflation expectations. The other is the Reserve Bank of India's (RBI) Inflation Expectations Survey of Households.

With inflation having stayed elevated for a prolonged period of time— headline retail inflation has been above the central bank's medium-term target of 4 percent for three full years and the year 2022 is the first time that the RBI has failed to meet its mandate to keep it between 2 percent and 6 percent—the Monetary Policy Committee (MPC) has increased interest rates aggressively over the last six months.

On September 30, the rate-setting panel announced a 50 basis-point increase in the repo rate to 5.9 percent, saying "further calibrated monetary policy action is warranted to keep inflation expectations anchored, restrain the broadening of price pressures and pre-empt second-round effects".

So far in the current rate-hike cycle, the MPC has increased the repo rate by 190 basis points. More monetary tightening is expected at the committee's meeting in the first week of December.

The MPC, however, is meeting on November 3 to discuss the report the RBI must submit to the government after it failed to meet the inflation mandate. The meeting was necessitated after Consumer Price Index (CPI) data for September confirmed the RBI had failed, with headline retail inflation averaging 6.3 percent in January-March, 7.3 percent in April-June, and 7 percent in July-September.

Though the inflation challenge remains, IIM-A's survey was indicative of moderation in price pressures.

"In this round, the cost pressure of the reporting firms shifts from very significant increase (over 6 percent) to moderate increase (3.1 percent to 6 percent)," the survey report said.

The percentage of firms perceiving over 10 percent year-on-year increase in costs fell to 21 percent in September from 26 percent in August.

The latest results of the BIES, which largely polls manufacturing firms, are based on the responses of around 1,000 companies. Most of the responses were received in the second half of September.