Businesses' one-year-ahead inflation expectations rose sharply to 4.58 percent in December 2023 from 4.04 percent in October 2023, according to the latest Business Inflation Expectations Survey (BIES) of the Indian Institute of Management-Ahmedabad (IIM-A).
The latest survey, released on February 5, also asked businesses to predict Consumer Price Index (CPI) inflation one year down the line. Businesses replied that CPI inflation may end 2024 at 4.96 percent, 23 basis points higher than their prediction of 4.73 percent in October 2023.
One basis point is a hundredth of a percentage point.
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"Overall, the firms are expecting increasing cost pressures," Abhiman Das, professor of economics at IIM-A, who conducts the survey, said.
As per the results of the survey, one-third of the firms polled think costs have increased significantly - or by more than 6 percent - up from 29 percent in the previous round of the survey. At the same time, the fraction of firms reporting 'moderate cost increase' - or 3.1 percent to 6.0 percent - remained around 29 percent.
The results of the survey - which has become an important input in monetary policy decisions - comes just ahead of the Reserve Bank of India's (RBI) interest rate decision. The Indian central bank's Monetary Policy Committee (MPC) began its three-day meeting on February 6 and will announce its interest rate decision at 10am on February 8. The rate-setting panel is largely expected to maintain the policy repo rate at 6.5 percent for the sixth meeting in a row.
The BIES largely polls manufacturing firms. The latest round of the survey, the 80th in the series, is based on responses mostly received in the second half of January.
The rise in inflation expectations of firms comes amid prices rising at a quicker pace. In December, headline retail inflation rose to a four-month high of 5.69 percent, although the increase was less than expectations of 5.9 percent. Meanwhile, Wholesale Price Index (WPI) inflation - which businesses face - rose to a nine-month high of 0.73 percent in December.
Unlike CPI inflation, WPI inflation was subdued for much of 2023, only rising above zero in November. It is expected to rise further in the coming months.
Retail and wholesale inflation data for January is set to be released on February 12 and February 14, respectively. As per the RBI's latest forecast, CPI inflation is seen falling to 4 percent in July-September 2024 before rising to 4.7 percent in October-December 2024.
Inflation expectations are keenly eyed by policymakers, as anchoring them is critical to ensuring price stability. On December 8, the MPC said monetary policy "must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission".
The IIM-A survey is one of only two surveys conducted in India to measure inflation expectations. The other is the RBI's Inflation Expectations Survey of Households. The latest round of the survey, released on December 8, showed that while three-month-ahead inflation expectations of households were steady in November 2023 at 9.1 percent, the one-year-ahead expectations were up 20 basis points at 10.1 percent.
While cost pressures have risen for manufacturing firms, sales expectations have also improved significantly, with about 57 percent of surveyed firms reporting 'normal' or greater sales in December 2023, up from 46 percent in November 2023.
"Overall, the profit margins expectations have also improved. Around 48 percent of the firms in December 2023 are reporting profit margins to be 'about normal' or greater – significantly up from 43 percent reported in November 2023," Abhiman Das added.
The survey measures 'normal' as the average of the preceding three years, excluding the Covid-19 period.
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