The 7% drop in net sales of BSE 500 companies on the Bombay Stock Exchange in the June quarter came as a negative surprise. Most analysts had predicted that sales would decline at a slower pace. Except in a few pockets, the final demand has been rather muted this year.
Sonal Varma, economist at Nomura Financial Advisory and Securities (India) Pvt. Ltd, infers from an industrial outlook survey of the Reserve Bank of India that Indian firms remain cautious about their expectations of final demand in the July-September quarter.
The central bank’s macroeconomic outlook, published in late July, includes a survey of quarter-ahead expectations of industrial performance.
Varma said in a note dated 6 August: “According to the survey, a higher net proportion of firms expect finished goods inventory to be above normal in the September quarter as compared to the June quarter, suggesting that final demand remains muted.”
The survey indicates that more firms expect below-normal raw material inventory, which when seen in conjunction with the expectation of above-normal finished goods inventory, could suggest that firms are cutting back on raw material stocks to better manage their variable costs, since there are no clear signs of final demand yet.
True, the survey was conducted in April-May and the results published in the next quarter may be different. Still, there’s little doubt that the pick-up in business sentiment hasn’t yet translated into proportionately higher investments by companies.
As far as the capital goods industry is concerned, there continues to be pricing pressure and order book growth remains sluggish. The below-normal monsoon is also a dampener as far as the outlook on final demand is concerned.
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