Manufacturing sector returned to growth in January, expanding at a four-month high pace on rise in new business orders, a monthly survey showed today, adding to the expectations of RBI keeping rates unchanged tomorrow.
The return to growth follows the first contraction in factory output in over two years in the previous month.
While Chennai floods had taken a toll on the manufacturing sector in December, the sector saw production as well as new orders -- both domestic and export -- surge in January, as per the monthly Purchasing Managers Index (PMI) survey conducted by Nikkei and Markit.
The Nikkei India Manufacturing PMI, a composite monthly indicator of manufacturing performance, stood at 51.1 in January, up from 49.1 in December. A figure above 50 represents expansion while a reading below this level means contraction.
"The opening month of 2016 saw a rebound in new business - from both domestic and external clients - leading manufacturers in India to scale up output following a short-lived downturn recorded in December," Pollyanna De Lima, Economist at Markit and author of the report said.
Though the trends in the growth rates are relatively weak in comparison with the long-run series averages, January's PMI data paints a brighter picture of the Indian economy, Lima said.
On inflation, the report said price pressure remained on the upside in January, with input costs and output charges both rising during the month.
"Although RBI is likely to continue its monetary policy loosening cycle in 2016, February's meeting will probably see the repo rate remaining unchanged at 6.75 per cent as the central bank will remain wary of inflationary pressures building in the country," Lima said.
According to official figures, WPI as well as retail inflation has been on a rising trend. In December, WPI-based inflation stood at (-)0.73 per cent, while retail inflation was 5.61 per cent.
The apex bank will announce its sixth bimonthly Monetary Policy Review of the fiscal tomorrow, the last before presentation of the Union Budget. However, experts believe RBI is unlikely to cut rates till the Budget.
The government recently lowered its economic growth forecast for 2015-16 to 7-7.5 per cent from 8.1-8.5 per cent.
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Japanese brokerage firm Nomura said the rise in August PMI is significant as the same had fallen between July and August in each of the last seven years.
Strengthening demand -- both domestic and external -- and easing inflationary pressure underpinned the pick-up in manufacturing activity, it said in a separate report.
According to Nomura, new orders for capital goods, which have been a weak point, also increased while firms continued to fulfil new ones using the existing inventory.
"Overall, strong order inflows and a rising backlog amid lower input costs point towards an improving business outlook.
"... We expect GDP growth (at market prices) of 7.3 per cent in 2016, from 7.2 per cent in 2015. Additionally, easing inflation pressure is consistent with our call of a 25 basis points repo rate cut in fourth quarter of 2016," it added.
