Crashing PMI may force rethink

Tight money supply and slowing growth may push central bank towards easing sooner than expected.

Frederic Neumann, co-head of HSBC’s Asian economic desk, describes the latest Purchasing Managers’ Index (PMI) readings across the world as a “sea of red.” While Europe is fast slipping into recession, most of Asia has hit a wall, he says. That, probably, explains the easing of reserve requirements in China, which happened simultaneously. Economists say this signals the start of a monetary policy easing in Asia. China’s PMI has dipped below 50 and that’s reason to worry.

India is not alone in the slowdown lane. HSBC’s India manufacturing PMI eased to 51 in November, against 52 in October. India’s historical average has been 56. The numbers indicate real activity in India is slowing, even as prices are not. According to HSBC, input prices (63.1 against 62 in October) and output prices (55.4 against 55.3 in October) accelerated and the readings continue to exceed historical averages. Underlying cost pressures, including from raw materials, are to blame in both cases. Says Mole Hau of BNP Paribas: “The survey’s pricing indicators, however, remain elevated and out of line with weakening demand. Sticky price pressures mean the RBI’s policy ‘space’ is cramped, with little scope for rate cuts to shore up growth until inflation decisively subsides.”

A segment is hopeful that if real activity in the economy continues to dip in December, the Reserve Bank of India (RBI) will be forced to ease its stance. The optimists are, therefore, expecting it to ease the reserve ratio, given the tight liquidity conditions. However, several others believe it is highly unlikely that RBI will go about easing so soon, as it had been increasing rates till a few weeks earlier. But, by January, the central bank will have to release Rs 100,000 crore into the system through open market operations.

So, what does this mean? This means that the economy is near stalling and the lagged effect of the central bank’s rate increases is now becoming evident.

Also, the RBI has, probably, overshot itself in its battle against inflation and there’s little it can do for growth and inflation.

Leif Eskesen, HSBC’s chief economist for India and Asean, says, “The manufacturing sector is approaching stall speed and the near-term prospects for growth are not encouraging.” The tide could possibly turn if there’s a reversal in the rate cycle or inflation declines meaningfully.