India is experiencing a strange phenomenon at the moment: The economy is strengthening but consumer confidence continues to drop.
The outlook on the general economic situation, employment scenario, income, and prices remains depressed, according to a survey conducted by the Reserve Bank of India (RBI), released on Dec. 06. “Both the current situation index and the future expectations index recorded a significant drop…households’ current perceptions on the general economic situation deteriorated further into the pessimistic zone for the fifth successive round,” the RBI noted.
In the survey conducted in November, Indian consumers scored 91.1 points on the confidence index, lower than the 95.5 points recorded in September. A score below 100 signals pessimism, a territory where India has been stuck since June this year.
Oddly, this comes at a time when there’s been a steady trickle of good news for the Indian economy. It expanded at a faster pace in the July-September quarter, at 6.3%, recovering from a three-year low of 5.7% in the April-June quarter. This is a result of the two key disruptive moves, demonetisation and the goods and services tax, beginning to fade.
Meanwhile, the Nikkei India Manufacturing Purchasing Managers Index, an indicator of growth in the sector, soared to a 13-month high. Credit-ratings agency Moody’s also upgraded India’s sovereign rating for the first time in 13 years.
Despite these improvements, consumers are apparently far from impressed.
Another survey by the RBI, spanning about 5,100 urban households, showed that over 80% of the respondents expect general prices to increase over the next quarter. More than half of them believe inflation will remain high. Indeed, food and fuel prices have been rising steadily since June, pushing inflation to a seven-month high in October.
This is a key reason why India’s central bank has decided to keep the policy rate unchanged. In its latest monetary policy review announcement on Dec. 06, the RBI said it has slightly revised its inflation target for the last two quarters of this financial year to between 4.3% and 4.7%. The previous target zone was between 4.2% and 4.6%. In short, the RBI will continue to adopt a wait-and-watch policy on interest rates.