India manufacturing remains strong; PMI increases 0.9 points to 58.5

Markit Research

The seasonally adjusted HSBC Markit Purchasing Managers’ Index (PMI) for India climbed for the third month running in February. At 58.5, up from 57.6 at the start of the first quarter, the index pointed to a considerable improvement in operating conditions faced by Indian manufacturers.

Underpinning the latest rise in the headline index were faster increases in new orders, output and employment.

Overall new business received by Indian manufacturers rose sharply in February. Data indicated that the increase was the most marked for a year-and-a-half and primarily supported by strong gains in domestic new orders. Although growth of incoming new work from abroad moderated on the month, it remained strong and above its pre-crisis trend. Better global economic conditions, successful advertising campaigns and good company reputations all contributed to the latest expansion, according to respondents. Production levels were raised substantially to accommodate the increase in new work.

Manufacturers had to use part of their existing holdings of finished goods to meet sales levels in February. Consequently, post-production holdings fell slightly. Meanwhile, pre-production inventories continued to expand, as firms reacted to market demand and raised their buying activity. Raw material purchases rose at a considerable pace that was the fastest for two years.

Despite stronger demand for inputs, vendors managed to reduce their delivery times, albeit only marginally. The index tracking trends in average supplier performance has registered close to the neutral level of 50.0 for a year, suggesting that lead times have been largely unchanged over this period.

As workloads mounted in February, Indian manufacturers noted a slight build up of outstanding business. To meet production requirements and ease pressures on capacity, companies took on new staff at a moderate pace that was the most pronounced for 19 months.

Input price inflation remained sharp during the latest survey period, with panelists reporting greater fuel and raw material costs. Higher prices for metals were particularly commented on by several firms. However, the rate of increase eased on January’s series peak.

Charge inflation slowed to a modest pace in February from the previous month’s 1.5-year high, which respondents linked to greater competitive pressures.

Commenting on the India Manufacturing PMI survey, Robert Prior-Wandesforde, senior Asian economist at HSBC, said: “Having wobbled slightly toward the end of last year, India's manufacturing PMI has now shown three consecutive improvements, hitting levels last seen in mid-2008. At 58.5, the headline index is consistent with on-going double digit gains in industrial production which in turn is likely to mean that spare capacity is being eaten into rapidly. Although the output prices balance surprisingly dropped back in February (while remaining consistent with price gains) there is more and more evidence of emerging supply-side constraints in labor and product markets. The breakdown of the PMI, for example, indicates that the balance of companies are now hiring again and at an historically robust rate. In our view, it is time to start unwinding the monetary stimulus and we would be very surprised if the RBI were not to raise policy rates at the 20 April meeting. While new export orders grew less strongly in February than January this didn't prevent the overall new orders series from hitting a high in the current upturn. The same was also true of output growth, which has rarely shown such strength since the series began in April 2005.” 

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