Bottom lines look better in Q3: RBI

Business expectations index for Oct-Dec '05 increased by 2.6% over its previous quarter.

Profit margins of companies and the overall business situation are expected to improve in the third quarter of 2005-06 compared with the second quarter ended September 30, 2005, according to the Reserve Bank of India's industrial outlook survey.

"The results indicate that the overall business situation, financial situation, availability of finance, production, order books, capacity utilisation, employment, exports and profit margins are expected to improve during the quarter October-December 2005 vis-a-vis July-September 2005," the RBI said in its mid-term review of macroeconomic and monetary developments.

With over 97 per cent of Crisil ratings indicating a stable outlook, the current financial health of corporate India could be adjudged to be healthy, the RBI said.

Industrial activity gathered further strength during the first five months of 2005-06, although there was some loss of momentum during July-August 2005 due to a high-base effect as also a slowdown in the growth of machinery and equipment.

According to the RBI survey, the business expectations index for October-December 2005 increased by 2.6 per cent over the previous quarter's level.

The assessment about the overall business situation for July-September 2005 showed the same level of confidence as in the previous quarter, but the level of confidence was higher than that during the corresponding quarter a year ago.

The RBI, however, pointed out that there were some indications that the corporate sector would have to be watchful in the short to medium term with the possible unfolding of potential risks. These risks could emanate from the sharp increases in oil prices, plateauing of growth rates in some key industries and infrastructure constraints.

Furthermore, with the manufacturing sector operating at high capacity, significant growth over the medium to long term will call for fresh investments that could involve higher borrowing, and consequent exposure to associated risks and possible deterioration of gearing ratios.

In this regard, it pointed to Crisil's modified credit ratio (the ratio of upgrades to downgrades) dropping after three years of increase. The ratio fell to 1.05 during April-September 2005 from an all-time high of 1.16 in 2004-05.

The RBI said the revival of the monsoon, the acceleration of industry, buoyancy in services, positive business confidence and expectations had improved growth prospects for 2005-06.