February purchasing managers index shows strong manufacturing trend

The momentum in India’s manufacturing sector strengthened in February and this is evident from the fact that HSBC’s India manufacturing purchasing managers index (PMI) rose to 57.9 in February from 56.8 in January.

PMI reflects the percentage of purchasing managers in a certain economic sector that reported better business conditions than in the previous month.

Leif Lybecker Eskesen, chief economist for India & Asean and Prithviraj Srinivas, economics associate of HSBC Global Research said in a report on Tuesday that growth is holding up well, but unfortunately this is at the cost of rising inflation. “The strong headline PMI readings and the acceleration in price pressures will keep Reserve Bank India (RBI) hawkish and in tightening mode, with another 100 basis points in rate hikes expected this year,” said Eskesen and Srinivas.

PMI is also one of the indicators that RBI would keep in mind in the next mid-quarter monetary policy review to be held later this month.

“We are looking at a rate hike in March because inflation pressures have not abated as much especially in the context of high crude oil prices and a likely upward revision in the domestic petrol prices. Third quarter GDP (8.2%) suggests that demand conditions still remains strong. The PMI data also seems to suggest that the momentum of economic activity remains,” said Shubhada Rao, chief economist, Yes Bank. Rao expects the RBI to hike key policy rates by 25 basis points in March.

According to Rupa Rege-Nitsure, chaief economist, Bank of Baroda, “Growth in PMI shows that the underlying growth momentum is strong. RBI will act on inflation with a single minded focus. Their view is that even in the short-run if they have to forgo growth they will go for that because with a medium-term perspective sustainable growth can be achieved only if you control inflation. PMI numbers released Tuesday will add comfort to RBI to increase rates.”

The finance minister in his budget speech pegged next year’s deficit at 4.6% of GDP.

Eskesen and Srinivas feel that the lower-than-expected budget deficit (4.6% of GDP) for next fiscal will help contain price pressures, but extra-budgetary demands are expected later during the financial year.

“Combined with lower-than-budgeted tax revenues, this will raise the final deficit above the target and lessen the degree of fiscal tightening,” said Eskesen and Srinivas in the report.