Demonetisation Pushed Down Consumer Confidence, Inflation Expectations, Show RBI Surveys

The central government’s decision to withdraw Rs 500 and Rs 1,000 notes on November 8 led to a sharp drop in consumer confidence and household inflation expectations, showed the results of surveys conducted by the Reserve Bank of India (RBI).

The consumer confidence survey, which measures households’ confidence in current economic conditions, income, spending, employment, and price levels, deteriorated sharply in December compared with the previous month, the survey showed.

The Current Situations Index showed that only 15.4 percent of respondents felt that economic conditions had improved in December compared with a year ago, down from 25.6 percent in November.

The sharpest decline was witnessed in households’ perception of their current incomes. Only 1.3 percent of respondents felt their incomes had improved from the same period a year ago, down from 20.1 percent in November.

However, the survey pointed out that the Future Expectations Index, reached an all-time high in the history of the survey, mainly on account of a significant improvement in the outlook for prices.

Inflation Expectations Cool

The December round of the RBI’s Inflation Expectations Survey of Households pointed to a sharp reduction in inflation expectations both three months and one year from now, the central bank said in a release on its website.

The survey, conducted across 18 cities, and with responses from 5,162 urban households, attempts to gauge expectations of price changes in key product groups.

This trend, the RBI said, was witnessed in all product groups, but was most prominent in food products and housing. The decline is likely linked to the drop in food prices after demonetisation and the expectation that property prices will fall.

The RBI found that the median of the current household inflation expectations declined to 6.5 percent in December from 9.9 percent a year ago, and 7.3 percent in November. Similarly, the expectations for the three-month ahead period fell to 7.3 percent from 9.9 percent a year ago, and 8.2 percent in November. The median expectation for inflation one year down the line fell from 10.1 percent in November to 8.3 percent now.

A key indicator of near-term inflation expectations, the survey showed, was the sharp increase in the number of respondents that expect a decline in general prices three months from now. As many as 13.3 percent of respondents anticipate a price reduction in three months, compared with 5.2 percent in November.

The six-member Monetary Policy Committee (MPC) voted unanimously to keep the policy repo rate unchanged at 6.25 percent in the sixth bi-monthly monetary policy review conducted Wednesday. A key parameter that contributed to this decision, according to RBI Deputy Governor Viral Acharya, was that though headline inflation had fallen substantially, core inflation continued to remain sticky.

This view was evident in the household survey. There was a reduction in the number of respondents that anticipated higher prices in non-food products, but not as much as that witnessed in the food products group. In fact, the number of respondents that anticipate a rise in non-food product prices three months from now remained flat at 57.8 percent, compared with 57.9 percent in November.

In its monetary policy statement, the RBI noted that the decline in headline consumer price inflation (CPI) in November and December was larger than expected but almost entirely on account of deflation in vegetables and pulses. It anticipates that headline CPI inflation will remain below 5 percent in the current quarter.

In the first quarter of next financial year, too, favourable base effects and the lag effect of demand compression could result in muted retail inflation, the RBI said. However, this is likely to pick up momentum thereafter as growth picks up and the output gap narrows. The RBI has projected that retail inflation will stay in the 4.0-4.5 percent range in the first half and then rise to the 4.5-5.0 percent range in the second.