Manufacturing PMI at three-month low in Jan

But inflation eases ahead of RBI's policy review, raising expectation of a rate cut

In January, India’s manufacturing activities expanded at a three-month-low pace, as orders moderated, showed the widely-tracked HSBC purchasing managers' index (PMI) on Monday. This was after the country’s manufacturing sector clocked a two-year-high rate of growth in December.

Meanwhile, a day before the Reserve Bank of India’s review of its monetary policy, the rate of inflation eased further — according to the PMI survey — raising expectations the central might advance a cut in the policy rate.

PMI declined to 52.9 points in January, compared with 54.5 in December. The index had stood at 53.3 points in November. A reading above 50 points shows expansion while one below that implies contraction.

Markit Economics, which compiles the PMI data, however, down-played the slower rate of growth in manufacturing activities. “Despite falling from December’s two-year-high level, the headline index remained consistent, with a solid improvement in business conditions in January,” it said.

Also, the expansion in India’s manufacturing sector during the month was not as slow as some other emerging-market peers. China’s, for example, saw contraction for a second straight month. Manufacturing PMI for that country stood at 49.7 in January, data showed.

Pranjul Bhandari, HSBC’s chief India economist, echoed this view: “The manufacturing activity continued to signal improvement in January, though the rate of growth slipped to a three-month low. This could be partly attributed to consolidation after two months of impressive uptick,” he said.

He said new orders, both from domestic and international sources, continued to grow, though at a slower pace than the previous month.

Markit Economics said new orders were the strongest in the consumer goods sector. It was here that the PMI data had not matched with the official data on the index of industrial production (IIP).

In the official data, consumer goods remained a drag, particularly the durables segment. For instance, consumer durables contracted 14.5 per cent in November last year, against a fall of 21.7 per cent a year ago. The durables also declined 15.9 per cent in the first eight months of 2014-15, against 12.6 per cent a year earlier.

The growth rate for new export business moderated in January, after having accelerated to the highest since April 2011 the previous month. But the overall pace of expansion was, nonetheless, solid and stronger than the historical average, Markit Economics said.

However, official data showed exports contracted in December as well, after a fall in October.

Growth of output and new business continued to have little impact on employment in January, as work force numbers rose only marginally during the month.

“Concurrently, backlogs of work rose at the fastest rate in a year, with some companies commenting on capacity pressures being applied by rising order book volumes,” Markit Economics said.

The rate of input inflation slowed to the weakest since April 2009, helped by lower prices paid for metals, chemicals, plastics and energy. As a result, output charges rose only fractionally during the month.

“On the inflation front, growth in input and output prices moderated further due to cheaper commodity prices,” Bhandari said.

This augurs well ahead of RBI’s policy review on Tuesday. It remains to be seen if the central bank would lower the interest rate on Tuesday, but there is a wide expectations that it might do so in the first half of the current calendar year.

“Sluggish growth and falling inflation further reinforce our view that RBI should deliver rate cuts upfront. We expect the repo rate to be lowered by 75 basis points in the first half of 2015,” Bhandari said.

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