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PMI at 37-month high, sparks moderate inflation

D K Srivastava, chief economic advisor at EY India, told dna that the survey of manufacturing and service activities revealed "why the repo rate was not reduced more".

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The reason why the Reserve Bank of India (RBI), on Tuesday, chose to go in for a modest 25 basis points (bps) cut in the repo rate can be found in the Nikkei India Composite Purchase Manager's Index (PMI) output index, which shows that the purchase price inflation of goods was at a three-month high last month, according to a senior economist at EY India.

D K Srivastava, chief economic advisor at EY India, told dna that the survey of manufacturing and service activities revealed "why the repo rate was not reduced more".

"It does indicate the reason why the repo rate was not reduced more of the fact that inflation might see some upward pressure due to the input costs going up" said the EY economist.

On Wednesday, the survey of India's private sector manufacturing and services activities revealed that its composite PMI had soared to a 37-month high in March to 54.3 from 51.2 in February as the purchase price inflation of goods creeped up to "a three-month high".

Pollyanna De Lima, economist at Markit that compiles the survey, too feels that the headline inflation could inch up in the months to come.

"Input costs across the private sector meanwhile rose at the quickest rate in three months and charge inflation likewise indicated accelerated, suggesting that headline inflation may pick up in coming months. That said, increased in prices remained relatively moderate," she said.

The EY economist also expects the inflation to creep up. He said even if it remained within the RBI's projected 5% rate, there could be inter-quarter variations. According to him, inflation rate would be dependent on how the agriculture performed in the current year.

"As inflation goes up, there would not be any further rate cut (by the RBI) but even if it remains stable or at about 5% there is not an expectation about an immediate rate cut, but if it falls rather sharply, we may expect another 25 basis point cut in another quarter's time," said Srivastava.

According to him, the second message in the business survey was that the economy was "looking up".

"The economy, overall, is looking up. And, this is indication of the anticipated positive effect of the Budget and the expectation that was built about the monetary policy easing. So, there is a moderate optimism in the economy that is now visible," he said.

However, despite the underlying optimism about the future economic growth prospects, the PMI data indicates that businesses were still operating below capacity and job creation also remained sluggish even as input and output prices rose at "rates that remained below their respective long run averages and were only modest".

As per the latest PMI data, backlogs saw downward trend for the second straight month.

"Despite the solid upturns in new business and output, the trend in employment remained subdued. Job creation across the private sector as a whole was seen for the sixth straight month but the rate of growth remained fractional overall," said the press release of Nikkei.

It said improved demand environment was enabling service providers to pass on part of their additional cost burden to clients.

"After offering discounts in the prior month, manufacturing companies raised their charges in March, although only modestly," said the Nikkei release.

Srivastava, however, felt that private consumption demand was still not growing at a "fast rate".

"I don't think the private consumption is increasing at a fast rate, but there is expectation that has been built in that once the Pay Commission awards are actually realised then disposable income would increase, there will be an increase in private consumption demand. That is why more capacity utilisation appears to have kicked in," he said.

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