India's factory growth slows to four-month low: PMI

The good news is that India's manufacturing sector continued to expand in February for the seventh consecutive month, driven by increasing output and new orders. However, according to a new business survey, the growth in factory activity has slowed to a four-month low while, on the price front, cost inflation is accelerating.

The Nikkei India Manufacturing Purchasing Managers' Index (PMI) has steadily fallen from a 5-year high at 54.7 in December 2017 to 52.4 last month and 52.1 in February, indicating modest improvement in operating conditions across India's goods producing economy. "It was promising to see that India's manufacturing sector remained in growth territory as the impact of July's Goods and Services Tax continues to dissipate. The expansion was primarily driven by marked rise in manufacturing production, whilst there were reports of improved underlying demand, with domestic and external sources driving new business gains," said Aashna Dodhia, economist at IHS Markit, which compiles the survey.

Total new orders, an indicator of domestic and export demand, rose for the fourth successive month during February. That said, the rate of growth was modest and the lowest in the current upturn. Similarly, new export orders rose for the fourth consecutive month, despite softening from January's 16-month high.

Although companies increased hiring this month in response to greater production requirements - the pace of job creation was slightly faster than at the start of this year - optimism about future output slipped to three-month low. Amid reports of delayed payments from clients, outstanding business rose during February and the rate of backlog accumulation quickened to the fastest pace since October 2016.

Input costs, meanwhile, increased for the 29th month during the period under review, with panellist reporting higher prices paid for steel, chemicals and fuel. "Cost inflation accelerated to the sharpest since February 2017, adding to expectations that inflationary risks will continue over the coming months," added Dodhia in a release. Meanwhile, manufacturers raised their output charges as part of attempts to pass through higher cost burdens to clients. "That said, although companies were able to raise their average selling prices at the fastest pace in a year, inflation remained modest highlighting some customer sensitivity to price changes," explained Dodhia.

Let's not forget that although retail inflation eased in January from a 17-month high in the prior month, price rises are still above the RBI's medium-term target of 4 percent. And "amid a stronger oil price forecast and growing fiscal risks, IHS Markit upgraded its CPI forecast to 5.2 percent for fiscal year 2017/2018", said the report.

This could pressurise the Reserve Bank of India (RBI) to raise interest rates in the near term, despite the Monetary Policy Committee noting that "the economy is on a recovery path", which needed to be "carefully nurtured" by leaving policy repo rate unchanged earlier this month.

For now, Indian manufacturers "remain optimistic towards the 12-month outlook for output" thanks to factors like forecasts of improvements in demand conditions.

With agency inputs