 "Banking stocks, PMI data drive markets")
During the day, the HSBC Purchasing Managers’ Index (PMI) showed manufacturing activity in India had picked up in December 2014. The index rose to a two-year high of 54.5 points in December, compared with a 21-month high of 53.3 the previous month (a reading of more than 50 shows expansion, while one below that level implies contraction).
The benchmark BSE Sensex rose 380.36 points, or 1.38 per cent, to 27,887.9, the most since December 8. The broad-based National Stock Exchange Nifty added 111.45 points, or 1.35 per cent, to close at 8,395.45. While ICICI Bank gained 2.81 per cent at Rs 362.6, State Bank of India rose 0.4 per cent and Axis Bank added 2.44 per cent.
The Bank Nifty, an index of 12 banking stocks, rose 1.64 per cent to close at an all-time high of 19,057.8, surpassing its previous high, hit on December 23.
Prateek Agrawal, chief investment officer, ASK Investment Managers, said bank stocks had gained on expectations that a two-day bankers’ summit that began in Pune on Friday would lead to reforms in the sector. “Processes will be implemented (which will help ensure) non-performing assets will be reduced...(steps might also be taken to address issues of) weaker banks,” he said.
Most BSE sectoral indices ended with gains on Friday.
Following the release of the PMI data, capital goods stocks, including L&T and BHEL, gained two per cent each. Investors lapped up capital goods and infrastructure stocks. Foreign institutional investors bought shares worth Rs 260 crore, while domestic investors invested Rs 70 crore, provisional exchange data showed.
For more than a year, manufacturing PMI has been in an expansion mode. Friday’s PMI reading comes as cheer at a time when official data has shown India’s manufacturing output dropped to a five-year low of 7.6 per cent in October.
A decline in global commodity prices, meanwhile, kept inflation in the manufacturing sector under control. This might give the Reserve Bank of India (RBI) scope to lower the policy rate for boosting economic growth.
Markit Economics, which compiles the manufacturing PMI data on the basis of a survey of 350 private companies, said in December, business conditions in India improved across segments. The widest expansion was seen in the consumer goods category.
This, however, appears out of sync with official data. The Index of Industrial Production (IIP) had showed the consumer goods category, particularly durables, had contracted. In October, production of consumer durables declined 35.2 per cent from a year earlier, while that of consumer non-durables fell 4.3 per cent, according to IIP data.
The findings of IIP and PMI are, however, similar in at least one respect: After the IIP showed production of capital goods had declined 2.3 per cent year-on-year in October, the PMI survey revealed order flows in investment goods were subdued. For the economy to turn around, expansion in the capital goods segment is necessary.
India’s economic growth stood at 5.5 per cent in the first half of this financial year, against sub-five per cent growth in 2012-13 and 2013-14.
Many are hopeful things will continue to improve. “The year 2015 seems to be really good for both the markets and economy. Things should improve further, with inflation falling, the economy recovering and monetary easing taking place,” said Nischal Maheshwari, head of research (wholesale capital markets), Edelweiss Financial Services.
"A steep rise in new orders from the consumer sector offset a slowdown in new order growth in investment goods. In our view, a rise in the latter is critical for a meaningful pick-up in economic growth," said Pranjul Bhandari, chief India economist, HSBC.
Overall, the latest PMI data reflect an improvement in demand in December, with new order flows increasing for a 14th consecutive month. In December, new export orders increased the most since April 2011.
If official data show a similar trend, there might have been a rise in India's merchandise exports in December. After falling in October, exports had seen an increase in November.
Contrary to continued growth in production and the inflow of new work, staffing levels in the manufacturing sector declined in December. Only the intermediate goods category saw an increase in hiring.
During the month, higher prices of metals, chemicals and electronics exerted pressure on input costs, though input cost inflation eased to the lowest in more than five and a half years and was well below the long-run series average. Weaker cost pressure was reflected in a relatively subdued rise in selling prices.
"In line with falling commodity prices through the past few months, input price inflation was modest. This trend was also seen in output prices. With the disinflationary trend gaining ground, RBI is expected to find space for some rate cuts in 2015," HSBC's Bhandari said.
The central bank has been somewhat reluctant on cutting the policy rate, despite continued demand from industry. But while maintaining status quo on the rate at its bi-monthly monetary policy review last month, it had said it might cut rates, even outside the review cycle, if the situation so warranted.