Manufacturing PMI tanks for first time in over two years

Weak growth will likely harden expectations that the Reserve Bank of India will ease policy further by June, provided inflation is under control.

By: ENS Economic Bureau | Mumbai | Updated: January 5, 2016 2:24 am

India’s manufacturing activity contracted in December for the first time in more than two years, hit by softening domestic demand, adding pressure on the Reserve Bank of India (RBI) to ease the monetary policy, a survey has said.

Nikkei’s Manufacturing Purchasing Managers’ Index, compiled by Markit, fell to a 28-month low of 49.1 in December, the lowest level of the index since March 2013, from November’s 50.3. The manufacturing sector output dipped as new orders fell sharply and production took a big hit from heavy rains in Chennai, with the PMI survey showing that the rate of contraction was sharpest in almost seven years since the global financial crisis.

The PMI has slipped below the crucial level of 50 for the first time since October 2013. A figure above 50 indicates expansion, while the one below this level means contraction. December’s incessant rainfall in Chennai impacted heavily the manufacturing sector, with lower orders leading companies to scale back output at the sharpest pace since February 2009.

According to the survey, the decline in manufacturing sector production was largely owing to a contraction in incoming new work for first time since October 2013. Around 18 per cent of survey panelists reported lower levels of new orders, which they commonly linked to heavy rains weighing on domestic demand. December’s floods also affected supplier performance, which deteriorated to the greatest extent since March 2013. The output sub-index fell to 46.8 from 50.4 the previous month, its lowest since early 2009, as new orders fell for the first time in more than two years.

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“India’s manufacturing sector took a turn for the worse at the year-end, with already-gloomy internal demand further hampered by floods in the south of the country,” Pollyanna De Lima, Economist at Markit and author of the report, said adding that “such was the extent of the decline that the rate of reduction was the sharpest since the financial crisis”.

On the price front, the survey said inflation rates of both input costs and output charges were at seven month highs. “The continued depreciation of the rupee against the US dollar pushed inflation higher, with PMI price indicators pointing to stronger increases in both input prices and output charges,” Lima said.

Weak growth will likely harden expectations that the Reserve Bank of India will ease policy further by June, provided inflation is under control.

Inflation has remained within the RBI’s January target range of 2-6 per cent, giving room for the central bank to shave 125 basis points from rates in 2015. After four moves, the benchmark rate currently sits at 6.75 per cent. The central bank is scheduled to hold its next monetary policy review next month, although three out of four rate cuts last year were effected outside the planned reviews. Following the US Fed rate hike and expectations of further increases, more currency weakness is anticipated, which in turn would add strain to businesses’ dollar-priced debt and import costs, Lima said.

The frail rupee boosted growth of new business from abroad, but corporate earnings can’t solely rely in external markets as global demand remains subdued, he said.

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