While the effect of demonetisation on the economy is waning, inflation expectations are beginning to pick up after a sharp decline
The latest results of the surveys conducted by the Reserve Bank of India (RBI) were released last week, giving us pointers to the mood of the nation.
First, business expectations for the first three months of this fiscal year look far better than in the preceding quarters as the economy recovers from the effects of demonetisation. Second, the expected demand recovery may not necessarily lead to higher industrial investment as capacity utilization is still low. Third, inflation expectations are beginning to pick up after a sharp decline. Fourth, fear of inflation has hit consumer confidence.
What does all this mean? The economy seems to be picking up, perhaps helped by signs of strength in the global economy, which is perhaps why exports have done well in recent months despite a strong rupee. Inflationary pressures are also building up, and companies may find it easier to pass higher input costs to consumers as the output gap narrows. It is going to be a complicated year ahead.