Business confidence takes a hard knock

RBI report on economy & monetary developments

Business expectations for April-June 2007 have dipped as lesser number of companies expect an increase in profit margins, production and working capital compared with the preceding quarter, according to a Reserve Bank of India (RBI) survey.

The survey is a part of the central bank's report on macroeconomic and monetary developments in 2006-07, which was released today.

The survey of 1,108 companies, however, shows an improvement in employment, exports, imports and selling prices. The RBI had conducted the survey during December 2006-January 2007.

The RBI also quoted another business survey by the Federation of Indian Chambers and Commerce and Industry (Ficci), in the third quarter of 2006-07 which suggested that the outlook on investment and exports for the six months ended June 2007 was "less encouraging". The reasons cited were rising prices of capital goods, increasing cost of credit and rising input prices.

The lending rates of commercial banks have increased during 2006-07. The weighted average benchmark prime lending rate of public sector banks increased to 12.5 per cent in March 2007 from 10.7 per cent a year earlier and that of private sector banks to 13.2 per cent from 12.4 per cent.

As per the RBI report, the year-on-year inflation was 5.7 per cent as on March 31, 2007 against 4 per cent a year earlier and above its target of 5.0-5.5 per cent.

Inflation movement in 2006-07 was driven by primary food articles and manufactured products prices, reflecting the impact of supply and demand pressures.

The report stated that the central bank continued with its policy of gradual withdrawal of monetary accommodation to stabilise inflationary expectations, while continuing to pursue its medium-term goal of a ceiling on inflation at 5 per cent.

Though there was a marginal deceleration in the demand for bank credit in 2006-07, it still continued to remain strong. On a year-on-year basis, banks' non-food credit grew 28 per cent at the end of March 2007 on top of 31.8 per cent a year ago.

The incremental credit-deposit ratio of banks, after staying around 100 per cent between October 2004 and September 2006, moderated in subsequent months, reflecting the combined impact of acceleration in deposit growth and modest deceleration in credit growth. At the end of March 2007, incremental credit-deposit ratio was around 86 per cent as compared with 110 per cent a year ago.