A day before the monetary policy review for 2011-12, two crucial data showed robust growth in manufacturing and infrastructure, giving the Reserve Bank of India (RBI) room to increase policy rates.
RBI is expected to tighten policy to tame inflation, which was around 9 per cent at the end of March, higher than its comfort level and the finance ministry’s projections.
The HSBC Purchasing Managers’ Index (PMI) for April showed manufacturing expanded by 58 points, the fastest in five months. A reading above 50 points means growth. PMI is compiled by financial information services company Markit.
At the same time, six core industries, accounting for one-fourth of industrial production, rose 7.4 per cent in March, as against 6.8 per cent in the same month of the last financial year.
Last financial year, the industries — crude oil, petroleum refinery, cement, electricity, finished steel and coal — grew 5.9 per cent as against 5.5 per cent in the previous year.(Click here for graph)
However, despite high PMI and core sector growth in many months of the last financial year, manufacturing and larger industrial growth, as measured by official data, were far below expectations.
For four months in a row, industrial growth was less than five per cent. It touched 3.6 per cent in February.
RBI usually relies on the official measure of industrial growth, the Index of Industrial Production (IIP), and not PMI. This was why RBI might go for a calibrated increase in policy rates, analysts said.
“The momentum in manufacturing picked up in April, albeit only slightly. The numbers confirm that growth is not a concern and RBI can continue its tightening cycle uninterrupted,” said Leif Eskesen, HSBC chief economist for India and Asean.
According to the PMI survey, Indian manufacturers reported a substantial increase in new business. “The ongoing improvement in market conditions and the high quality of goods produced were cited as the main growth drivers,” said a statement by Markit. This is despite new export orders slowing to a three-month low.
PMI is based on a survey of around 500 companies. The survey found input prices rose sharply in April, with cost inflation at a 25-month high, though the rate of increase slowed a bit.
The growth in six infrastructure industries was led by crude oil and finished steel, whose output rose 12.1 per cent and 9.9 per cent, respectively, as against 3.5 per cent and 7.7 per cent, respectively, in March 2010.
“The numbers are good but will not have a major impact on IIP. They will stabilise IIP but not pull it up,” said Ficci Director General Rajiv Kumar.
If RBI increases policy rates tomorrow, it will be the ninth time since early 2010.
As against RBI’s projection of 8 per cent and the finance ministry’s expectation of 7-7.5 per cent, wholesale price inflation rose to 8.98 per cent in March.