Firms' inflation expectations hit 3-month low of 4.4% in March: IIM survey

Inflation expectations, as per the IIM survey, fell for the second straight month in March after posting a sharp increase in January.

Inflation expectations of businesses fell to a three-month low in March, reversing much of the increase posted in January.

According to the latest Business Inflation Expectations Survey (BIES) of the Indian Institute of Management-Ahmedabad (IIM-A), released on May 5, one-year ahead inflation expectations of Indian companies declined by 13 basis points to 4.40 percent in March from 4.53 percent in February.

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

Inflation expectations had surged to a five-month high of 4.79 percent in January.

Inflation expectations are keenly eyed by policymakers as anchoring them is critical to ensuring price stability. On April 6, when the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) last met and surprised markets by leaving the repo rate unchanged at 6.5 percent, the rate-setting panel had said “it is essential to rein in the generalisation of price pressures and anchor inflation expectations”.

Headline retail inflation has been running well above the RBI's medium-term target of 4 percent for more than three years now. In fact, prior to its base effect-led fall to 5.66 percent in March, Consumer Price Index (CPI) inflation was above the upper bound of the central bank’ 2-6 percent tolerance range in 12 of the previous 14 months. This forced the MPC to hike interest rates by 250 basis points in 2022-23.

IIM-Ahmedabad’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 round of this survey, released on April 6, showed that both three-months-ahead and one-year-ahead inflation expectations of households cooled by 30 basis points each to 10.2 percent and 10.5 percent, respectively.

Firms' view

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 April.

In a sign of further cooling of input prices, around 13 percent of the respondents felt costs had increased very significantly - or by more than 10 percent - in March on a year-on-year basis, down from 15 percent of firms in February.

While inflation expectations have declined, businesses are pessimistic about their performance.

“For the past couple of months, there are signs of the economy slowing down,” Abhiman Das, professor of economics at IIM-A who conducts the survey, noted.

As per the survey’s findings, more than 27 percent of firms reported ‘much less than normal’ sales in March, slightly down from around 30 percent in February. However, the percentage of firms reporting ‘somewhat less than normal’ sales increased to 30 percent from 28 percent in February.

The survey measures ‘normal’ as the average of the preceding three years, excluding the Covid-19 period.

Meanwhile, on the profit front, expectations are subdued, with more than 34 percent of businesses of the opinion that their profit margins are ‘much less than normal’, only slightly down from around 35 percent in February. Further, the percentage of firms who feel their profit margins are ‘somewhat less than normal’ rose to more than 37 percent from 33 percent in February.

These subdued expectations of businesses as per the IIM-A survey are in stark contrast to the picture being painted by S&P Global’s Purchasing Managers’ Index (PMI). Data released on May 1 showed India's manufacturing PMI rose to a four-month high of 57.2 in April. More strikingly, the services PMI surged to a near-13-year high of 62.0.