Lower prices take hold as businesses' inflation expectation hits 26-month low

Representational Image.

The continued softening of prices seems to have influenced businesses to arrive at an over two-year low inflation expectation for December.

According to the latest Business Inflation Expectations Survey (BIES) of the Indian Institute of Management-Ahmedabad (IIM-A), released on February 5, one-year ahead inflation expectations of Indian companies slumped by 51 basis points from November to 4.19 percent in December. One basis point is one-hundredth of a percentage point.

At 4.19 percent, the one-year-ahead inflation expectations of Indian firms is the lowest is the lowest since October 2020, when they were recorded at 3.78 percent.

The sharp 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 February 6.

The committee is expected to hike the repo rate by 25 basis points to 6.5 percent on February 8, having raised it by a massive 225 basis points in 2022 to bring down elevated inflation.

While consumer price index (CPI) inflation fell to a one-year low of 5.72 percent in December, wholesale price index (WPI) inflation, which is what businesses face, crashed to a 22-month low of 4.95 percent in the last month of 2022.

Inflation expectations are keenly eyed by policymakers as anchoring them is critical to ensuring price stability. On December 7, when the MPC last met and hiked the policy rate by 35 basis points, it had said in its statement that "further calibrated monetary policy action is warranted to keep inflation expectations anchored".

According to businesses, CPI inflation one-year down the line is seen at 4.91 percent, down from 5.32 percent they had expected in October.

The businesses' forecast of where the CPI inflation will be at the end of 2023 will also bring cheer to the RBI. According to the central bank, CPI inflation is seen averaging 5.9 percent, 5 percent, and 5.4  percent in the first three quarters of 2023.

Prices apart, there was more good news.

In November, Abhiman Das, professor of economics at IIM-A who concusts the survey, had noted there were "clear signs" of the economy slowing down given subdued sales expectations of firms.

However, December saw improvement in expectations of sales and profit margins.

The percentage of firms reporting 'much less than normal' sales fell to 25 percent in December from 33 percent in November, while around 30 percent of firms in December reported sales were 'about normal', sharply higher than 22 percent in November.

In this context, 'normal' refers to the average level in the preceding three years, excluding the Covid-19 period.

Around 31 percent of firms surveyed in December thought profit margins were 'much less than normal', down from 40 percent in November.

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 January.