Although Indian manufacturing conditions continued to improve for a the 10th straight month in May, the latest Nikkei India Manufacturing Purchasing Managers' Index, or PMI, fell to 51.2 for the month from 51.6 in April. In other words, activity in the manufacturing sector grew at a weaker pace, as reflected by weaker expansions in output as well new orders and employment.
Incidentally, the PMI has dropped from a 5-year high at 54.7 in December 2017. For the record, a reading above 50 on the index indicates economic expansion, while a reading below 50 points toward contraction.
But there is bad news on the inflation front. "A build-up of inflationary pressures re-emerged with input cost and output charge inflation at the strongest since February, due to the upswing in global oil prices. As a net importer of crude oil, this could potentially destabilise India's recovery, particularly in private consumption," said Aashna Dodhia, economist at IHS Markit, which compiles the survey. Input costs have increased for the 32nd month in a row and, reflecting the higher cost burdens, firms raised their selling prices in May.
Significantly, the inflationary pressures suggest that an interest rate hike is on the cards. "IHS anticipates that high oil prices will lead to a further depreciation of the Indian rupee and a wider current account deficit. Subsequently, in efforts to contain inflation and maintain financial stability, it is likely that the RBI will raise interest rates over the summer," added Dodhia.
According to Reuters, the surge in oil prices over the past few months means India's retail inflation has remained above the RBI's target of 4 per cent for six months, increasing pressure on the central bank to act sooner than previously expected. In fact, a Reuters poll of economists predicted a rate hike by the apex bank in August and the latest PMI data backs them up. It's a dramatic turnaround from just a month ago when analysts had predicted an increase only in the second half of 2019.
The survey also showed that new orders, an indicator of domestic and export demand, rose in May but as was the case with output, the upturn was modest. A sub-index tracking overall demand declined to 51.6 last month from 52.0 in April, suggesting domestic demand may still be recovering from the botched implementation of a new national tax system last year. However, amid reports of greater demand from international markets, Indian manufacturers reported the strongest gain in new export orders since February.
Meanwhile, purchasing activity declined for the first time in seven months in May, albeit only fractionally. "Reflecting the trends observed in output and new orders, firms raised their staffing levels in May, albeit at a softer pace. Greater production requirements were cited as the key reason behind the latest rise in employment," said the survey report, adding, "Looking ahead, business optimism was weak by historical standards".
With Reuters inputs