India's manufacturing PMI fell to 50.1 in July from 50.3 in June, due to a continued contraction in output and new orders.
Export orders remain expansionary, but moderated in July.
Price pressures have surfaced again as the input price index rose due to rising imported inflation pressures (weak INR).
The output prices index also rose, albeit at a slower pace, which suggests margins are under pressure.
Overall, the PMI data suggest that, even as domestic demand remains weak, price pressures are rising. Apart from the
external sector stress, this is another reason for the RBI to remain cautious.
The manufacturing PMI fell to 50.1 in July from 50.3 in June, its lowest level since April 2009 and just above the contraction/
expansion threshold of 50. The decline was due to continued weakness in the output and the new orders sub-indices.
Weaker demand: Both domestic and external demand weakened in July (Figure 1). The new orders sub-index fell to 49.5
in July from 49.7 in June, reflecting weak domestic demand, while the new export orders index fell to 52.4 from 54.4.
Sectoral data suggest the decline in new orders was mainly in the intermediate and investment goods sectors.
Output contracts, inventory lowered: The output sub-index remained below the 50 threshold for the third straight month
(even as it rose to 49.8 from 49.1), which indicates that weak demand, increased competition and persistent supply-side
pressures are forcing manufacturers to cut production. The new orders/inventory ratio reversed after seven straight
months of decline and rose marginally to 0.99 from 0.97, as manufacturers lowered inventories - the finished goods
inventory sub-index fell to 50.1 from 51.0.
Price pressures resurface: The input price sub-index surged to 60.6 from 55.9, reflecting higher imported price pressures
due to a weak INR (Figure 2). More importantly, the output price sub-index, which has a lagged correlation with core WPI
inflation, rose to 53.4 from 50.9, as firms attempted to pass on higher costs, albeit at a slower pace, which suggests
margins are under pressure.
Bottom line: The PMI data suggest that, even as domestic demand remains weak, price pressures are rising. Apart from the
external sector stress, this is another reason for the RBI to remain cautious. We are negative on India‟s economic outlook due to
continued external sector pressures, tighter liquidity conditions, weak growth and political risks ahead of elections (see India:
Turbulent times ahead, 19 July 2013). In our baseline scenario (70% likelihood), we expect repo rates to remain on hold this fiscal
year and GDP growth at a below-consensus 5.0% y-o-y in FY14 (year-end March 2014), the same as in FY13.
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Export orders remain expansionary, but moderated in July.
Price pressures have surfaced again as the input price index rose due to rising imported inflation pressures (weak INR).
The output prices index also rose, albeit at a slower pace, which suggests margins are under pressure.
Overall, the PMI data suggest that, even as domestic demand remains weak, price pressures are rising. Apart from the
external sector stress, this is another reason for the RBI to remain cautious.
The manufacturing PMI fell to 50.1 in July from 50.3 in June, its lowest level since April 2009 and just above the contraction/
expansion threshold of 50. The decline was due to continued weakness in the output and the new orders sub-indices.
Weaker demand: Both domestic and external demand weakened in July (Figure 1). The new orders sub-index fell to 49.5
in July from 49.7 in June, reflecting weak domestic demand, while the new export orders index fell to 52.4 from 54.4.
Sectoral data suggest the decline in new orders was mainly in the intermediate and investment goods sectors.
Output contracts, inventory lowered: The output sub-index remained below the 50 threshold for the third straight month
(even as it rose to 49.8 from 49.1), which indicates that weak demand, increased competition and persistent supply-side
pressures are forcing manufacturers to cut production. The new orders/inventory ratio reversed after seven straight
months of decline and rose marginally to 0.99 from 0.97, as manufacturers lowered inventories - the finished goods
inventory sub-index fell to 50.1 from 51.0.
Price pressures resurface: The input price sub-index surged to 60.6 from 55.9, reflecting higher imported price pressures
due to a weak INR (Figure 2). More importantly, the output price sub-index, which has a lagged correlation with core WPI
inflation, rose to 53.4 from 50.9, as firms attempted to pass on higher costs, albeit at a slower pace, which suggests
margins are under pressure.
Bottom line: The PMI data suggest that, even as domestic demand remains weak, price pressures are rising. Apart from the
external sector stress, this is another reason for the RBI to remain cautious. We are negative on India‟s economic outlook due to
continued external sector pressures, tighter liquidity conditions, weak growth and political risks ahead of elections (see India:
Turbulent times ahead, 19 July 2013). In our baseline scenario (70% likelihood), we expect repo rates to remain on hold this fiscal
year and GDP growth at a below-consensus 5.0% y-o-y in FY14 (year-end March 2014), the same as in FY13.
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