Business Confidence Survey - Oct 08

Here's A Ray Of Hope...

Though interest rates & exchange rate remain major challenges for India Inc, there's been a healthy improvement in expectation regarding inflation rate vis-à-vis the previous round of the survey

ARE we finally headed towards an economic slowdown? Even though India's nomenclature of a domestically-driven economy continues to uphold its GDP expectations at 7%, Corporate India now seems to be preparing itself for a deceleration in economic activity in the coming quarters.

Hence, it's no surprise that the ET-NCAER Business Expectations Survey, conducted to assess the business community's expectations about the economy, indicates a decline in Business Confidence Index (BCI) for the third consecutive quarter in a row. While many factors have attributed to this pessimism, the financial market conditions seem to be one of the major contributors of this decline.

There has been a healthy improvement in respondents' expectation regarding the inflation rate vis-à-vis the previous round of the survey.

In fact, inflation rate has finally started to cool down, which is reflected in the current round of the survey. While a majority of respondents in the previous round of the survey expected inflation to be in the range of 8-10%, they now expect it to be below 8% for the quarter ended December '08. This is likely to relieve some pressure on profit margins of manufacturing companies.

Most respondents expect the average rate of Wholesale Price Index (WPI) to be around 6.5% for the period October-December '08. And these respondents seems to have been quite accurate in their judgement. After hovering around the range of 8% in November '08, the inflation rate came down to 6.84% for the week ended December 6, '08, rekindling hopes of a revival in the economy.

However, a majority of the respondents expect the Consumer Price Index (CPI) to hover around 9.03% for the quarter ending December '08. While the expectations regarding inflation rate have improved vis-à-vis the previous round, respondents' perception about interest rates heading downwards continues to be bleak.

Thus, even as most business houses continue to pay interest rates ranging from 9-12% for long-term investment projects, they do not anticipate these rates to come down at least by March '09. This is despite the monetary policy measures undertaken by the central bank in attempt to bring down interest rates.

The same holds true for the outflow in terms of interest on working capital funds. Most of the companies which participated in the current round of the survey expect the current interest rates of 12-16% to continue till the end of the current financial year.

The sentiment with regard to the exchange rate has worsened in the current round of the survey. The rupee's depreciation versus the US dollar over the past few months continues to remain a major concern for India Inc. But of late, the rupee has once again begun to appreciate versus the dollar.

While in the previous round of the survey, only 22% of the respondents had anticipated the rupee to hover above Rs 45 per dollar till March '09, in the current round, as many as 80% of the respondents expect it to hover in the range of Rs 47.8-47.9 per dollar by the end of the current financial year.

Bakul Chugan
bakul.chugan@timesgroup.com