According to Nomura, the PMI, which fell to 50.1 in July from 50.3 in June suggest that, even as India's domestic demand remains weak, price pressures are rising
India's manufacturing PMI fell to 50.1 in July from 50.3 in June, due to a continued contraction in output and new orders. Overall, the PMI data suggest that, even as domestic demand remains weak, price pressures are rising and besides external sector stress, this is another reason for the Reserve Bank of India (RBI) to remain cautious, says Nomura Financial Advisory and Securities (India) Pvt Ltd.
The manufacturing PMI fell to 50.1 in July from 50.3 in June, its lowest level since April 2009 and just above the contraction/ expansion threshold of 50. The decline was due to continued weakness in the output and the new orders sub-indices.
Both domestic and external demand weakened in July. The new orders sub-index fell to 49.5 in July from 49.7 in June, reflecting weak domestic demand, while the new export orders index fell to 52.4 from 54.4. Sectoral data suggest the decline in new orders was mainly in the intermediate and investment goods sectors.
Output contracts, inventory lowered:
The output sub-index remained below the 50 threshold for the third straight month even as it rose to 49.8 from 49.1, which indicates that weak demand, increased competition and persistent supply-side pressures are forcing manufacturers to cut production. The new orders/inventory ratio reversed after seven straight months of decline and rose marginally to 0.99 from 0.97, as manufacturers lowered inventories - the finished goods inventory sub-index fell to 50.1 from 51.0.
Price pressures resurface:
The input price sub-index surged to 60.6 from 55.9, reflecting higher imported price pressures due to a weak rupee. More importantly, the output price sub-index, which has a lagged correlation with core WPI inflation, rose to 53.4 from 50.9, as firms attempted to pass on higher costs, albeit at a slower pace, which suggests margins are under pressure.
Nomura said, "We are negative on India’s economic outlook due to continued external sector pressures, tighter liquidity conditions, weak growth and political risks ahead of elections. In our baseline scenario (70% likelihood), we expect repo rates to remain on hold this fiscal year and GDP growth at a below-consensus 5.0% y-o-y in FY14 (year-end March 2014), the same as in FY13."