These are trying times for professional forecasters. Events have been moving at such rapid a pace that forecasts become worthless almost as soon as they are made. Take, for example, the Reserve Bank of India’s (RBI) latest survey of professional forecasters done in the second half of September. Asked what they thought the level of the cash reserve ratio (CRR) would be at the end of the December quarter, the median forecast was of 9%. The maximum forecast was of 9.5%, while the minimum was 8.5%.
With effect from 8 November, CRR has been reduced to 5.5%. That’s not all—the median forecast for CRR was 9% at the end of December this year and March 2009, 8.9% at the end of June 2009 and 8.5% at the end of September next year.
What this means is that nobody, not even professional forecasters, had an inkling of the liquidity squeeze that would be faced by the banking system in the country.
Similarly, the median forecast for the repo rate was 9% at the end of December this year, March 2009 and June 2009, and 8.5% at the end of September 2009. But the repo rate today is already 7.5%. The truth is nobody expected RBI to shift so rapidly from targeting inflation to worrying about growth.
The panel’s forecast for earnings growth is even more intriguing. It assumes a growth of 17.4% in profit after tax (PAT) for the September quarter, but the RBI data doesn’t explain what the sample consists of.
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PAT growth for the companies that comprise the Sensex was 9.6% year-on-year for the September quarter, so the forecasts are very optimistic. More importantly, the median forecast for corporate profit growth is 17.5% for the December quarter, 17.8% for the March 2009 quarter, 18% for the June 2009 quarter and 19% for the September 2009 quarter. Note that the assumption is that earnings growth has more or less already bottomed out and we’ll now be seeing slow, but steady improvement.
While corporate profits may have bottomed, the markets have not. The median forecast for the Sensex is 13,100 points for end-December 2008, 13,000 for end-March 2009, 15,825 for end-June 2009 and 17,800 points for end-September. During the previous forecast, the targets were 14,700 points by end-December this year, 16,025 by end-March 2009 and 17,900 points by the end of June 2009.
During the forecast made in the March quarter, the estimate was of a Sensex level of 19,477 by end-December this year. Once again, events have rapidly overtaken the forecasts.
And finally, here is the forecast for the rupee-dollar rate: Rs45.50 by end-December this year; Rs44.60 by end-March 2009, appreciating to Rs43 by end-September 2009. The forecasters clearly do not believe in the dollar’s strength.
It’s easy, with the benefit of hindsight, to knock the forecasters. Perhaps the lesson best learned from these forecasts is the extreme volatility that prevails at present.
In fact, the effect on forecasts is perhaps the least important part of the prevailing uncertainty. As James Abraham, senior partner and director of the Boston Consulting Group, said: “The drop in prices that Indian companies were factoring in for the next few years has happened in the last three-four weeks.” The same will be true of companies trying to hedge their currency exposures.
Graphics by Ahmed Raza Khan / Mint
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