HSBC chief economist terms RBI?s repo rate cut premature and too aggressive
After indications of weak industrial production data for March, the widely-tracked HSBC Purchasing Managers’ Index (PMI) survey showed owing to power cuts, manufacturing growth in April fell for the third month. The PMI for manufacturing rose from 54.7 points in March to 54.9 points.
A PMI reading of more than 50 points denotes growth, while that below 50 shows contraction. The PMI comprises many factors, including output growth and orders.
Meanwhile, HSBC chief economist for India and Asean Leif Eskesen termed the Reserve Bank of India (RBI)’s move to cut the repo rate by 50 basis points premature and too aggressive, as rising input prices and higher taxes were being passed to customers. Budget 2012-13 had raised both excise and services taxes by two percentage points to 12 per cent each.
Wholesale price-based inflation stood at 6.89 per cent in March. “Inflation accelerated, with both output and input prices rising faster. This suggests upside risks to inflation remain and RBI’s rate cut could turn out to have been premature and too aggressive,” Eskesen said.
Surprisingly, exports orders remained strong in April, according to the survey of 500 private companies, even as official data showed outbound shipments contracted 5.7 per cent in March. Official data calculates annual growth, while the PMI readings are month-on-month estimates.
The survey report said though manufacturing output in April rose at the slowest pace so far this year, new orders remained high. However, power cuts prevented firms from producing at a quicker rate. This implies while demand in the economy was strong, supply-side bottlenecks still persist. Electricity growth, according to the index of eight core industries, fell from 8.6 per cent in February to 2.1 per cent in March.
The new orders’ sub-index rose to 61.1 points in April, after falling to 58.1 in March, buoyed by strong exports. Though it remained above 50, the factory output index fell for the third month.
The index of eight core industries showed expansion in March stood at just two per cent, and this would also reflect in the index of industrial production (IIP), in which manufacturing plays a major role.
Madan Sabnavis, chief economist, CARE Ratings, said, “Though the PMI does not have a strong relation with IIP, industrial performance has been week since January, and core industry data also suggests there was no turnaround in the fortunes of industrial performance.” He added going by the trend, industrial output in April may not be buoyant.
According to the PMI, the rate of rise in costs accelerated for a consecutive month, the sharpest since August 2011. RBI, in the annual policy meeting on April 17, had cut the repo rate to eight per cent. According to a statement by financial services firm Markit Economics, which compiles PMI, respondents largely attributed inflation to increased raw material costs. It also cited higher taxes.
Output inflation rose at the third-fastest rate in the history of the series. Again, higher raw material costs and tax increases were highlighted by respondents, as they passed these to clients.
Higher workloads led to manufacturers increasing purchasing activity in April. However, the rate of growth in buying inputs slowed to the weakest in four months. As purchasing activity slowed, stocks of inputs fell for the first time since February 2009. Finished goods stocks rose slightly in April, though at the weakest pace since December.
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