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This indicates that more bad news is round the corner for India's manufacturing sector.
As the rupee keeps depreciating against the dollar, firms refrained from building inventories. HSBC chief economist for India and ASEAN Lief Eskesen believed that RBI short term measures to choke liquidity to arrest rupee slide may not be withdrawn any time soon.
After inching up in June, the manufacturing growth barely managed to remain in the growth trajectory. A reading above 50 points indicates growth, while that below 50 signifies a contraction in the sector.
"The latest reading was indicative of a broad stagnation of manufacturing operating conditions in India", said Markit Economics, the financial information firm that compiles the PMI.
The PMI figures assume importance since official data showed yesterday that the eight core industries grew at an almost stagnant pace of 0.1% in June against 7.9% growth in June a year ago. This may drag down industrial growth in June as core sector has almost 38% weight in the Index of Industrial Production. IIP fell 1.6% in May and the June figures will come next week.
Manufacturing output, which is one component of PMI, continued to fall for the third consecutive month in July due to declining new orders, tough economic conditions and shortage of raw material. However, the rate of decline was not as much as it was in June. "Activity in manufacturing sector was broadly flat in July. Output fell by less, but orders flows weakened led by slower growth in export orders", said Eskesen.
New export orders rose during July which took the current expansionary sequence to 11 months. The panel members involved in the research process stated that there was foreign demand but that was coupled with increased competition and hence, export business growth was "modest and the weakest in three months."
Also, the quantity of items purchased continued to rise in June, hence continuing a 52- month growth. However, it was the slowest in this month. "Of the three monitored sub-sectors only one registered higher buying activity, namely consumer goods", the firm said in its monthly report.
Markit Economics also stated that due to depreciating value of rupee, vendors were reluctant to import raw materials and stocks of purchases fell for the first time, however slightly, since April last year.
It also pointed out that inflationary pressures sustained in July and as a result, output prices rose at the fastest rate since February. Also, due to higher prices of metals, chemicals, plastic, etc, the overall input prices rose sharply in July, and "at the strongest rate in ten months." However, there was also expansion in the rate of job creation, albeit modest.
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Eskesen believed that the data could limit RBI's scope of a rate cut and also the recent liquidity tightening measures taken by RBI will not be rolled back anytime soon.
"The data suggests that the RBI will likely have to keep policy rates on hold for a while given lingering inflation risks and that the recently introduced currency stabilization measures will not be lifted anytime soon”, said Eskesen.
