Firms' inflation expectations fell to 4.53% in February, IIM survey shows

Inflation expectations, as per the IIM survey, fell in February after posting a sharp increase in January.

Inflation expectations of producers fell in February after a one-month blip although hopes about their businesses worsened, according to a new survey.

According to the latest Business Inflation Expectations Survey (BIES) of the Indian Institute of Management-Ahmedabad (IIM-A), released on April 3, one-year ahead inflation expectations of Indian companies declined by 26 basis points from 4.79 percent in January to 4.53 percent in February.

One basis point is one-hundredth of a percentage point.

The fall in inflation expectations will be music to the ears of policymakers, especially those from the Reserve Bank of India (RBI), whose Monetary Policy Committee (MPC) began its three-day meeting on April 3.

The committee is widely expected to hike the repo rate by 25 basis points to 6.75 percent on April 6, having raised it by a massive 250 basis points in 2022-23 to fight elevated inflation.

Inflation expectations are keenly eyed by policymakers as anchoring them is critical to ensuring price stability. On February 8, when the MPC last met and hiked the policy rate by 25 basis points, it had said in its statement that "further calibrated monetary policy action is warranted to keep inflation expectations anchored".

The fall in businesses' inflation expectations in February is key especially after it posted a sharp 60-basis-point increase to 4.79 percent in January, as per the aforementioned survey.

Headline retail inflation, the RBI's policy anchor, has already reared up its head in recent months and spent the last two months above the upper bound of the central bank's 2-6 percent tolerance range.

With the MPC meeting this week, the IIM-A survey asked its respondents what they thought Consumer Price Index (CPI) inflation would be one year down the line. The responses showed a marginal 3-basis-point increase in their estimates from December to 4.94 percent in February.

Prices apart, the survey's findings were darker.

More than 30 percent of the firms surveyed in February reported 'much less than normal' sales, sharply up from 24 percent in January.

Similarly, there were indications of worsening expectations with regard to profit margins, as more than 35 percent of firms perceived profit margins as being 'much less than normal', up from 28 percent in January.

"Firms' sales expectations remain subdued and profit margin expectations have worsened," Abhiman Das, professor of economics at IIM-A who conducts the survey, noted.

"There are early signs of the economy slowing down," Das added.

Questions have been raised about India's growth prospects, with GDP data released at the end of February showing India's growth rate fell to 4.4 percent in October-December. However, the government and the RBI have both defended the economy's prospects, saying it is well-positioned going into 2023-24.

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

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 March.