Tuesday, 4 October 2016

India’s factory activity moderates in September

India’s manufacturing activity has moderated in September indicating that the growth in the sector has lost some momentum, creating a case for a reduction in interest rates by the Reserve Bank of India.

According to a Markit Economics report, Nikkei India Manufacturing Purchasing Managers’ Index, a gauge measuring activity in the manufacturing sector stood at 52.1 in September compared to 52.6 in August, with a reading above 50 signaling expansion in the manufacturing activity over the previous month.

The activity in the Indian manufacturing industry eased slightly in September but the output is still rising at a decent pace and the sector looks likely to have delivered a stronger contribution to the GDP growth in Q2 FY2016/17, with the quarterly reading for the PMI’s Output Index up from 51.4 during April-June to 53.6.

The biggest area of strength for factory growth was the external demand as firms witnessed robust surge in new export orders since July 2015, supported by the growth in output and purchasing activity, while new improved client demand also supported the upswing in order books.

As far as prices of manufacturing goods are concerned, the survey noted that the average purchase costs increased at a faster pace in September, but one that was weak compared to its long-run trend. Data implied that manufacturers attempted to protect profit margins as output charges were raised further.

Despite ticking higher, the rate of inflation was historically muted and it has given the central bank enough room to ease policy further. The Reserve Bank of India in its monetary policy review today slashed its key lending rate or the repo rate by 25 basis points to a six-year low of 6.25 per cent, from 6.5 per cent.

Consumer inflation in India cooled sharply to 5.05 per cent in August, almost at the RBI's March 2017 medium-term target of 5 per cent, and with favorable monsoon rains, it is expected to tread lower in the coming months.

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