India Inc's inflation expectation settling around 4.3%, shows IIM survey

Inflation expectations are keenly eyed by policymakers as anchoring them is critical to ensuring price stability.

Inflation expectations of Corporate India seem to be settling around 4.3 percent, with the latest Business Inflation Expectations Survey (BIES) of the Indian Institute of Management-Ahmedabad (IIM-A) showing that it declined to 4.37 percent in January.

As per the results of the survey, released on March 5, India Inc's one-year-ahead view of inflation is down 21 basis points from 4.58 percent in December 2023. One basis point is a hundredth of a percentage point.

Also Read: Explained – 'Discrepancies' in GDP data and how they affect headline growth rate

"Average inflation expectation of the firms for the past six months works out to be around 4.3 percent," the survey noted, with Abhiman Das, professor of economics at IIM-A who conducts the survey, saying firms expecting "moderation in cost pressures".

Respondents to the BIES are primarily manufacturing firms. The latest round of the survey is the 81st and is based on responses mostly received in the second half of February.

Inflation expectations are keenly eyed by policymakers, as anchoring them is critical to ensuring price stability. On February 8, the Reserve Bank of India's Monetary Policy Committee (MPC) said monetary policy must continue to be "actively disinflationary" to ensure inflation expectations are anchored.

As per the IIM-A survey, the number of businesses that reported a 6-percent plus increase in costs in January edged down to 31 percent from 33 percent in December. Further, 25 percent of firms felt their costs had increased by 3.1-6.0 percent. In December, this figure stood at 29 percent.

The findings seemingly corroborate other high-frequency indicators that are also suggestive of easing inflation expectations. As per India's Purchasing Managers' Index (PMI), the input cost inflation faced by the manufacturing sector in February was the lowest since August 2020. Even service providers' operating expenses rose at the second-weakest rate since August 2020, as per the services PMI released on March 5.

At the same time, headline retail inflation measured by the Consumer Price Index (CPI) cooled to a three-month low of 5.10 percent in January. The RBI has predicted it will fall to 4.0 percent in July-September before edging up to 4.6-4.7 percent subsequently.

Reducing the inflationary pressures will be of great comfort to the central bank, which has found it difficult to tame the retail price hike. Buffeted by multiple global shocks, CPI inflation has stayed above the RBI's medium-term target of 4 percent for 52 months in a row. Consequently, the MPC said last month it remains "resolute in its commitment to aligning inflation to the target".

On February 8, the MPC left the repo rate unchanged at 6.5 percent for the sixth meeting in a row. While India's interest rates are at their highest level in nearly eight years, economists think the continued better-than-expected growth performance of the economy could allow the MPC more time to ensure inflation, especially food inflation, falls to acceptable levels on a durable basis.

"We must remain committed to successfully navigating the 'last mile' of disinflation which can be sticky. As markets are front-running central banks in anticipation of policy pivots, any premature move may undermine the success achieved so far," RBI Governor Shaktikanta Das said in his statement in the minutes of the February 6-8 meeting of the rate-setting panel.