Manufacturing activity, indicated by the Purchasing Managers’ Index (PMI), fell to 50.7 in December from 51.3 in the previous month due to fall in new domestic orders. Exports, however, held up and inflation softened.
The PMI reading reflects expansion above 50 and contraction below 50. This was the second consecutive month of expansion. At 49.6, manufacturing PMI had contracted in October.
“The slowdown was led by a deceleration in domestic orders. Despite the weaker growth print, backlogs of work rose at a faster pace and supplier delivery times lengthened,” said Lief Eskesen, chief economist for India and ASEAN at HSBC.
While levels of employment improved, producers blamed raw material shortages and frequent power outages for the slowdown. External demand helped. New export orders were up at 51.6 from 50.6 in November.
Inflation showed signs of easing in December. Both, input as well as output price inflation moderated, though marginally. “The strengthening of exchange rate since August has helped reduce imported inflation and weak domestic demand is also contributing,” said Eskesen in a report. Going forward, improvement in food supplies should also help contain inflation pressures in the near term, he added. Structural factors, fuel price adjustment and sticky inflation expectations may limit easing of inflation.
“If the softening in inflation pressures materialise in the Consumer Price Index and Wholesale Price Index numbers released later this month, the Reserve Bank of India (RBI) may feel compelled to remain on hold again,” said Eskesen.
The inflation numbers will be released mid-January while the RBI is slated to announce the third quarter monetary policy review on January 28. 2014. In the mid-quarter review last month, the central bank had indicated a rate action on off-policy dates in case the situation warrants.
The RBI had kept policy rates unchanged in December despite an alarming increase in inflation at retail and wholesale levels. The RBI governor Raghuram Rajan had said that the central bank would prefer to wait and watch the trend rather than act on one-off spike in inflation.
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