Manufacturing PMI rises to 17-month high in July

Manufacturing activities in India this July rose the most in 17 months on increased orders, according to the HSBC Purchasing Managers' Index (PMI).

However, this also raised prices, due to which the Reserve Bank of India (RBI) might hold the policy rate in its policy review next week. On the other hand, workers were laid off for the first time in 10 months, albeit moderately.

PMI was up at 53 points in July from 51.5 in June. Any reading above 50 shows an expansion and any below it is a contraction.

In line with the headline indicator, output grew at the quickest rate in 17 months (since February 2013) in July, marking a nine-month period of increased production, said Markit Economics, which compiles PMI data.

Frederic Neumann, co-head of Asian economic research at HSBC, said: “Finally, the manufacturing sector is starting to gather steam. A flood of new orders, both from domestic and external sources, has led to a surge in the activity.”

Among the monitored sub-sectors, makers of intermediate goods raised production at the sharpest pace.

The July data confirmed reports of further improvements in demand, as new orders increased at an accelerated pace, extending the current sequence of growth to nine months.

“Details within the survey show all monitored categories witnessed a rise in output and order flows,” Neumann said.

Though the methodology used in PMI and the official Index of Industrial Production (IIP) is different, the broad numbers are in sync with the trend. The IIP data for June and July are yet to come but manufacturing did increase 2.5 per cent and 4.8 per cent in April and May, respectively, after contracting for two earlier months. The eight core sector industries, which have a combined weight of 38 per cent in the IIP, rose by a nine-month high of 7.7 per cent in June, signalling that IIP and manufacturing could see better recovery in the month.

Similarly, new business from abroad rose for a 10th successive month in July. Panellists commented on strong demand from key export clients. This indicates export numbers in July would also be robust, after rising in double digits in May and June.

The PMI findings are in line with the latest data on the global front. The US economy grew four per cent in April-June, after contracting 2.1 per cent in January-March.

However, workforce numbers in July were reduced for the first time since September 2013, though, the rate of job shedding was marginal. Nonetheless, decline in employment was seen by producers of consumer and intermediate goods, with only investment goods firms reporting job creation.

Concurrently, the backlog of work increased in July and a number of panel members cited problems with power supply. Input buying rose across each of the sub-sectors, with the strongest increase by intermediate goods companies.

Higher prices paid for metals, plastics, textiles, packaging, food and energy led to a further marked increase in input prices in July. The rate of cost inflation was the quickest since February.

Neumann cautioned, “The speed of the recovery has also lifted price pressures, with input prices rising steeply. This means RBI may not cheer as loudly as the rest of us.”

RBI is slated to come out with its monetary review on Tuesday and it is widely expected to hold its policy rate.