Rupee Depreciation Hurts India Business Confidence - MNI India Business Sentiment At Lowest Since February 2014

A lower proportion of companies were optimistic about the current business environment in September as subdued foreign demand and a sharp depreciation in the rupee offset the positive impact of lower inflation on business sentiment. The MNI India Business Sentiment Indicator, a gauge of current sentiment among BSE-listed companies, fell to 61.4 in September from 62.3 in August. 

Confidence has now declined for three consecutive months, wiping out the gains made in June on the back of the rate cut by the Reserve Bank of India and leaving the indicator 13.8% down on the year and 4.4% below the level seen at the start of 2015. The sharp deceleration compared with last year is due to a large base effect as Prime Minister Narendra Modi’s historic victory had led to a substantial rise in confidence in 2014 on expectations that his government’s pro-business policies would improve the business environment. While there has been some progress in the ease of doing business, it has been slow, and a growing sense of realism has seen business confidence wane.    
  
Panellists reported that growth of new work was stymied by softer foreign demand. Export Orders were 8.6% below the series average while New Orders were down 7.2% on the year. 

A sharp depreciation in the rupee added to companies’ import bills and made foreign loans more expensive to service. The indicator which measures the Effect of the Rupee Exchange Rate fell below the 50 level for the first time in three months in September, implying that the exchange rate was hurting business operations. 

A decline in global commodity prices led to an easing in raw material costs for the third consecutive month in September. Given the weakness in demand, cost reductions were passed along the supply chain, resulting in output prices falling to the lowest level in more than two years. 

Commenting on the latest survey, Chief Economist of MNI Indicators Philip Uglow said, “Growth in some of India’s largest companies is being held back by the weakness in global demand and the negative impact of the rupee on operations. Overall business confidence is back at the lows seen in 2014 while orders appear to have resumed their steady downward course.”

“RBI action to lower rates this year has helped to reduce the extent of the downturn in business confidence, but with inflation low there is clear scope for the central bank to cut the key rate further at its late September meeting. Such a move seems even more likely given the decision by the US Federal Reserve to stand pat this month.”

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