Inflation expectations

by Mahesh Vyas

Reserve Bank of India probably had a premonition. They feared inflation would rise and lo and behold, it did rise almost obligingly. In doing so, it provided the central bank instant gratification for its policy to hold rates.

All-India Consumer Price Index in November 2017 was 4.9 per cent higher than it was in November 2016. This is the highest y-o-y increase in 16 months.

Like the RBI, markets have been expecting inflation to rise as well. 10-year G-sec yields have been rising in anticipation of higher inflation. A day before the CPI data were released it closed at 7.17 per cent; they were closer to 6.9 per cent a month ago. A persistent rise in crude oil prices among other factors provided an early cue.

While regulators and markets got the direction right, professional forecasters of the financial markets had their expectations slightly off the mark. The consensus of a Reuters poll just before the announcement was an inflation of 4.2 per cent in November which, was quite low compared to the announcement of 4.9 per cent by the Central Statistics Office.

Professional forecasters from RBI’s survey had expected in their November responses that CPI would register a growth of 3.9 per cent in the October-December 2017 quarter. The average growth in CPI during October and November works out to 4.2 per cent. It is apparent by now that inflation during the third quarter of 2017-18 would be higher than expectations of professional forecasters.

Yields on 10-year G-sec bonds have continued to rise after the announcement of inflation estimates. As of December 13, they had touched a high of 7.25 per cent and the weighted average was 7.21 per cent.

Although inflation has risen and markets seem to anticipate a further rise in the same, it cannot be denied that inflation has come down substantially over the past 17 months. In spite of this sustained fall in inflation, households believe that inflation is not going to fall any further. The synchronised expectations of a reversal in the trend in households and markets is remarkable.

In an RBI survey conducted in November 2017, only five per cent of household respondents believed that inflation would decline in the coming three months or even 12 months. Contrast this against expectations a year ago in November 2016 when 11-12 per cent households believed that inflation would be lower; or around the end of 2015 when 23-24 per cent believed that inflation would be lower.

Inflation did decline in line with household expectations. It fell from about 5.6 per cent at the end of 2015 to 3.4 per cent in December 2016 to 2-3 per cent in mid-2017.

So, RBI has good reason to consider results of its October and November 2017 surveys when the number of people believing that inflation will decline has itself declined and, the number of households who believe that inflation will increase has shot up to 53 per cent.

Most of the increase in CPI in November 2017 comes from vegetables. This is surprising because usually in the winter months, prices of vegetables are expected to fall. Supply disruptions caused by cyclone Ockhi is a possible reason for the anomalous behavior of vegetable prices this winter. If this is indeed true then, since the cyclone has passed, vegetable prices could revert back to normal in the coming weeks.

Monthly increase in vegetable prices (%)
Year/Month October November December
2014 -3.3 -2.8 -7.8
2015 -1.1 -1.3 -7.4
2016 0.3 -6.2 -11.7
2017 3.8 6.9  

It is possible, though, that cyclone Ockhi is not the only reason. Ockhi hit southern India in late November but, vegetable prices were unusually high in October as well. Prices do fall in October and November but, in 2017, they rose in both these months.

But, the food did not lead inflation in November. Inflation in the food index at 4.4 per cent was lower than the overall increase of 4.9 per cent. The highest inflation at the broad group level was 7.9 per cent in fuel and light.

Inflation in the food index could step down in the coming months. But, fuel and light and housing are likely to remain elevated. The Seventh Pay Commission recommendations shows up in the high 7.4 per cent increase in housing inflation. This would sustain itself for sometime.

Core inflation is a better policy target as it is a more policy-independent demand variable. The recent GST rate cuts could help in bringing down core inflation. The only sticky element in core inflation is housing.

So, while inflation is expected to rise in the coming months, it is unlikely to be a runaway increase.

CMIE STATISTICS
Unemployment Rate
Per cent
5.4 -0.0
Consumer Sentiments Index
Base September-December 2015
95.6 0.0
Consumer Expectations Index
Base September-December 2015
96.0 0.0
Current Economic Conditions Index
Base September-December 2015
95.0 0.0
Quarterly CapeEx Aggregates
(Rs.trillion) Sep 17 Dec 17 Mar 18 Jun 18
New projects 1.25 1.49 3.60 2.27
Completed projects 1.25 1.15 1.42 0.86
Stalled projects 0.69 0.88 3.41 0.30
Revived projects 0.34 0.22 0.26 0.22
Implementation stalled projects 0.78 0.71 1.92 0.03
Updated on: 16 Jul 2018 9:20AM
Quarterly Financials of Listed Companies
(% change) Sep 17 Dec 17 Mar 18 Jun 18
All listed Companies
 Income 7.9 12.0 10.4 18.1
 Expenses 9.0 13.0 17.1 21.2
 Net profit -18.0 -14.3 -80.7 7.3
 PAT margin (%) 5.5 4.8 1.2 19.3
 Count of Cos. 4,501 4,491 4,280 25
Non-financial Companies
 Income 8.2 13.3 11.9 18.2
 Expenses 8.1 12.3 12.8 22.2
 Net profit -6.0 13.2 -1.6 5.7
 PAT margin (%) 6.2 6.4 6.6 20.1
 Net fixed assets 9.2 11.9
 Current assets 2.9 8.2
 Current liabilities 11.0 10.6
 Borrowings 3.4 1.6
 Reserves & surplus 7.9 8.0
 Count of Cos. 3,466 3,469 3,317 19
Numbers are net of P&E
Updated on: 16 Jul 2018 9:20AM
Annual Financials of All Companies
(% change) FY15 FY16 FY17 FY18
All Companies
 Income 5.6 1.8 5.8 12.3
 Expenses 5.7 1.9 5.8 17.9
 Net profit 0.1 -9.3 26.2 -51.0
 PAT margin (%) 3.0 2.8 3.5 3.6
 Assets 9.5 10.2 7.3 14.1
 Net worth 8.5 11.3 7.0 11.0
 RONW (%) 5.8 4.9 5.9 4.8
 Count of Cos. 26,056 24,316 21,815 218
Non-financial Companies
 Income 4.8 1.0 5.7 9.8
 Expenses 5.0 0.3 5.9 9.3
 Net profit -8.5 20.4 21.4 11.9
 PAT margin (%) 2.0 2.5 3.0 13.4
 Net fixed assets 13.3 17.4 6.5 21.2
 Net worth 7.0 12.0 5.7 5.3
 RONW (%) 4.6 5.2 6.1 17.7
 Debt / Equity (times) 1.1 1.1 1.0 0.2
 Interest cover (times) 1.9 1.9 2.1 16.0
 Net working capital cycle (days) 66 65 62 -12
 Count of Cos. 21,269 20,387 18,246 150
Numbers are net of P&E
Updated on: 04 Jul 2018 4:50PM