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The Reserve Bank of India’s latest Industrial Outlook Survey shows that despite input cost pressures, businesses are optimistic about demand and business sentiments are positive. Why does RBI conduct this survey and how does it help policymaking? Mint explains.

What do business sentiments mean?

Business sentiments simply indicate whether companies are confident in carrying on their activities in the given economic environment. Positive sentiments signal that they are upbeat and have an optimistic outlook while negative sentiments indicate pessimism. The RBI conducts an Industrial Outlook Survey (IOS) regularly to assess the overall macroeconomic situation, which is factored in while forecasting economic performance. It is a qualitative assessment of the business climate as perceived by Indian manufacturing companies and their expectations of the ensuing quarter.

How does RBI assess business sentiment?

The IOS primarily comprises of two indices—the Business Assessment Index (BAI) and Business Expectations Index (BEI). There are nine factors based on which inputs from 1,239 companies were taken. These are: overall business situation; production; order books; raw material inventory; finished goods inventory; profit margins; employment; exports and capacity utilization. Both indices provide a snapshot of the business outlook in the quarter and values range between 0-200, with a value above 100 indicating an expansion in overall business activity and vice versa.

Onward and upward
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Onward and upward

How have sentiments moved recently?

Based on production, order books, capacity utilization, employment and foreign trade, firms were upbeat about demand in Q1 FY 23. While a rise in cost of funds and other factors of production was perceived, overall business sentiments were positive at 110.7 in Q1 FY23. Capacity utilization in manufacturing sector rose to 75.3% in Q4 FY22 from 72.4% in Q3 FY22.

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What do the latest figures indicate?

The BEI, which rose to 137.7 for Q2 FY23 from 134.7 in Q1 FY23, indicates that corporates are maintaining an optimistic outlook. Businesses are confident of positive results based on a good monsoon and better agricultural performance, improved energy consumption, rise in e-way bills, and GST collections. Good monsoon can revive rural consumption. Expectations for Q3 FY23 and Q4 FY23, which exhibits successive improvement in demand conditions, could be due to the approaching festival season.

How does it help in policymaking?

The RBI’s monetary policy committee considers business sentiments while finalizing policy rates. Similarly, business sentiment is a useful indicator at the time of preparing the annual budget. It also alerts the government with regard to the immediate economic situation and may compel intervention through short-term measures if required. Businesses now expect selling prices to rise, which bodes well for the industry.

(Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH)

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