India's manufacturing sector expanded the fastest over two years in May, guided primarily by a sharp increase in production backed by new orders, even as input costs continued to rise sharply. The seasonally adjusted HSBC Purchasing Manager's Index (PMI) climbed to its highest level since February 2008 at 59 in May, up from 57.2 in April.
"The Indian economy is hardly pausing for breath. Output growth remains at a robust pace and new orders continue to pour in. Price pressures remain elevated and are of concern. This signals a need for further monetary tightening, although cooling of new export orders do mirror a possible slowdown in the global trade cycle," said Frederic Neumann, co-head of Asian Economics Research at HSBC.
Most analysts said the Reserve Bank of India would closely monitor the inflation rate, and if prices continued to rise, the bank might increase key policy rates by 25-50 basis points in its fourth quarter monetary policy review, due on July 27.
With most growth indicators on track and manufacturing maintaining a consistent robust growth, analysts are not ruling out the possibility of RBI increasing the policy rates before July.
The survey showed business conditions at the manufacturing end were rapidly and consistently improving, as production rose sharply for the 14th consecutive month. According to the survey, manufacturing activity levels rose in response to gains in new businesses, which companies linked to favourable economic conditions and strong demand from both public and private sectors. The data showed the domestic market remained the primary driver of new order growth, as the rate of rise in export orders weakened during the month.
Both input and output price inflation abated marginally since April. However, the survey indicated that inflation levels remained firmly above their long-term series trend. Purchasing costs increased at a rapid pace, which respondents linked to greater raw material prices, especially that of metals. During the month, manufacturers passed on a part of the input price inflation to customers by way of higher charges, which rose for the ninth consecutive month.
On the back of new orders, employment got a boost as manufacturers hired additional staff and added to pre-production stocks in May. Job creation, though modest, was the most marked since August 2005. Buying activity rose sharply, resulting in a survey record increase in raw material holdings.
Outstanding business accumulated at an accelerated level during the month, as increased orders resulted in longer supply delivery times. To meet sales levels and honour delivery agreements, manufacturers depleted existing stocks of finished goods.
