Consumer Confidence, Inflation Expectations Take A Turn For The Worse, Show RBI Surveys

Consumer confidence in the current state of the economy slipped into negative territory in March for the first time since September 2014, after having declined sharply in December, a survey conducted by the Reserve Bank of India (RBI) showed.

Household confidence had declined sharply in December after the government's demonetisation of Rs 500 and Rs 1,000 notes. This continued through the March quarter.

The Current Situation Index of the RBI's Consumer Confidence Survey, an indicator of households' confidence in the current economic conditions, income, spending, employment, and price levels slipped into the “pessimistic” zone. This, the RBI found, was primarily because households felt that economic conditions and the prevailing prices had worsened compared with the previous year.

There was also a sharp decline in the Future Expectations Index, which attempts to capture households' confidence in the state of the economy a year hence.

The survey showed that economic conditions had worsened for most respondents in March compared with a year ago. Similarly, there was a sharp rise in the number of respondents that felt that prices and spending had increased compared with the same period a year ago.

U-Turn On Inflation Expectations

After having declined sharply in December, inflation expectations rose in March, a survey of 5,084 urban households conducted by the RBI in March showed.

As many as 73.8 percent of respondents felt that general prices would rise three months hence, up from just under 60 percent in the December round of the survey. What's more, a large portion of the respondents expect that prices will increase more than the current rate. The survey showed that a majority of respondents expect inflation to range between 5-8 percent over a three month period.

The RBI's monetary policy committee on Thursday decided to keep the policy rate unchanged on worries that inflation would trend upwards. The RBI, in its monetary policy statement, said it would stick to its medium term target of maintaining consumer price inflation at 4 percent plus or minus 2 percentage points, but did not specify a timeline within which this would be achieved.

In February, driven by a rise in prices of fruits, sugar, and confectionaries, retail inflation rose to 3.65 percent from 3.17 percent in January. The central bank has projected that retail inflation is likely to average 4.5 percent in the first half of the current financial year, and 5 percent in the second half.

However, it has also cautioned that there are upside risks to its baseline projection on inflation, key among which is the effect of El Nino on the South West monsoons.