'Industrial cycle may soon move to recovery phase'

Industrial cycle in India may soon move from a slowdown to a recovery phase as the rate of change in leading indications shows signs of improvement, according to Nomura economists.

Paris-based Organisation for Economic Co-operation and Development (OECD)’s composite leading index (CLI) for India was at 93.6 in November 2011, 0.21 per cent lower than a month ago.

Even though the index was far below the long-term trend of 100 and also the December 2008 low of 95.6, some signs of improvement are visible, according to Nomura, Japan’s largest brokerage.

“Even as growth remains below trend, the rate of change in the OECD-CLI has improved over the last six months, suggesting that the industrial cycle may soon move from slowdown to a recovery phase,” Nomura’s Mumbai-based economists Sonal Varma and Aman Mohunta said in a note to clients.

The OECD-CLI components that have led to the improvement include production of non-metallic minerals (mainly cement), passenger car sales and M1 money supply. “In our opinion, lower input cost pressures and raw material inventory restocking could be behind the improvement,” Nomura economists said.

“The implication is that industrial production could surprise positively in coming quarters. The improved December manufacturing purchasing managers’ index (PMI) also supports this view.”

Manufacturing PMI in India climbed to 54.2 in December, the highest in six months, from 51 in November, according to HSBC. Nomura economists, however, expect any recovery in the industrial cycle to remain below-trend until RBI starts cutting rates or the investment climate improves. Early this week, RBI reduced the cash reserve ratio to 5.5 per cent from 6 per cent, but left the benchmark repurchase rate unchanged at 8.5 per cent.