Overall, even as the PMI improved in June, the internal factors (rise in inventory, the fall in domestic orders to sub-50, rise in input costs) are not encouraging, said Nomura in its Asia Insights report
After falling for three consecutive months, India’s manufacturing PMI rose to 50.3 in June from 50.1 in May led by an expansion in external demand even as domestic demand remains sluggish. External demand continues to improve: the new export orders index increased to 54.4 in June from 54 in May. However, the new order index fell to 49.7 (the lowest since March 2009) in June against 50.5 in May, indicating a further deterioration in domestic demand, according to Nomura in its Asia Insights report.
Output continued to contract, but it improved slightly to 49.1 in June from 48.6 in May. Finished goods inventories rose to 51.0 in June from 50.6 in May as producers started restocking inventories in anticipation of better external demand. However with domestic demand weak, the new order/inventory ratio fell to 0.97 in June compared to 1 in May, a sign of further weakness, said Nomura.
The brokerage believes that price pressures are rising. The input price sub-index rose to 55.9 in June from 51.3 in May reflecting a weak currency. The output price index also increased to 50.9 from 49.8 as producers passed some of the higher input costs onto consumers. With input costs rising faster than the output prices, the margin ratio (output/input price index) worsened to 0.91 in June from 0.97 in May.
Overall, even as the PMI improved in June, it has averaged 50.5 in the second quarter of calendar 2013, lower than 53.1 in Q1, due to weak domestic demand, said Nomura. The internals are also weak: the rise in inventory, fall in domestic orders, and the rise in input costs. “The external sector remains India’s Achilles’ heel as a weak currency can further raise imported inflation pressures, force producers to raise output prices to protect their margins, and delay rate cuts despite weak demand, said Nomura in its report.
With financial stability concerns (due to a weak currency) far more important, Nomura expects the Reserve Bank of India (RBI) to keep policy rates on hold at its next meeting on 30th July. Beyond that, its forecasts 50bp cumulative repo rate cuts towards end-2013, but the risk is rising that rate cuts may be further postponed. Nomura remains comfortable with its below-consensus GDP growth forecast of 5.6% y-o-y in FY14 as India’s growth recovery is likely to be very gradual at best.
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