Businesses' inflation expectations dropped below 6% in May, IIM survey shows

In what will bring some relief to the Reserve Bank of India, inflation expectations of Indian businesses dropped below 6 percent in May.

According to the Indian Institute of Management-Ahmedabad's (IIM-A) Business Inflation Expectations Survey (BIES), released on July 5, one-year ahead inflation expectations of Indian companies fell sharply to 5.58 percent in May from 6.02 percent in April.

"There are early signs of business inflation expectations tapering off, after remaining close to or above 6 percent during January-April 2022," the survey report said.

Anchoring inflation expectations is critical to ensuring price stability. In an interview to Moneyontrol in late May, IIM-A Professor Abhiman Das, who conducts the BIES, had said inflation expectations of Indians have already snapped loose.

However, while announcing a 50-basis-point increase in the repo rate in its June 8 statement, the RBI's Monetary Policy Committee (MPC) had said there is a need for "calibrated monetary policy action to keep inflation expectations anchored and restrain the broadening of price pressures".

The committee, which meets next in August, is expected to increase the policy rate again and keep doing so going forward until it reaches at least 5.5 percent from the current 4.9 percent, according to economists.

Inflation has been a concern even before the coronavirus pandemic hit in early 2020. The latest headline retail inflation of 7.04 percent for May was the 32nd consecutive month it had come in above the RBI's medium-term target of 4 percent and the fifth month in a row it stayed above the 6 percent upper bound of the 2-6 percent tolerance range.

In fact, the central bank's most recent inflation forecasts suggest the MPC will fail to meet its mandate when Consumer Price Index (CPI) data for September is released in mid-October.

The MPC is deemed to have failed when average CPI inflation is outside the 2-6 percent tolerance band for three consecutive quarters.

While forecasts are key inputs in the setting of monetary policy, policymakers use inflation expectations to gauge where prices are expected to go in the future.

It is, however, difficult to measure expectations, with the BIES being one of only two surveys conducted in India to measure inflation expectations, with the other being the RBI's Inflation Expectations Survey of Households.

Some of the other findings of the latest BIES are:

* Companies' responses indicated the persistence of high-cost pressures, with more than 66 percent of firms perceiving a significant (over 6 percent) cost increase for the fourth consecutive month.

* Companies' sales expectations have fallen sharply, with 34 percent of them expecting "somewhat less than normal" sales in May as against 27 percent in April.

* For the fifth consecutive survey round, around 80 percent of the businesses reported "much less than or somewhat less than normal" profit. Normal, in this context, is the average for the preceding three years, excluding the Covid-19 period.

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