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The jump in India’s manufacturing PMI in December suggests that the manufacturing sector has recovered from its weakness last year and supports the view that the recent economic slowdown has run its course. And given the scale of policy loosening throughout last year, the outlook for local manufacturing is likely to be brighter in 2020, according to the latest research report from Capital Economics.
India’s manufacturing PMI jumped to a seven-month high of 52.7 in December from 51.2 in November. The breakdown showed that the output component climbed to 54.8 in December from 52.7 in November. Similarly, the new orders component increased to 53.8 from 52.0.
Beyond the major categories, arguably the most useful component of the manufacturing PMI is the output price reading, which is a reasonable leading indicator for wholesale prices. It spiked to 53.3 in December from 51.8 in November. That’s the highest it has been in in almost three years which indicates that the recent rebound in WPI inflation is set to continue.
Today’s release will help to ease concerns over the health of the manufacturing sector. According to the latest national accounts data released in December, manufacturing output in Q3 contracted in annual terms for the first time since 2017. The rise in the PMI reading last month suggests that the worst is over for local manufacturing, the report added.
In terms of the policy implications, the strength in the PMI reading means that the space for further rate cuts is diminishing. And given the larger-than-expected acceleration in headline CPI inflation in November, and the continued jump in food inflation since then, we think that the RBI will leave its rates on hold at the coming MPC meeting in February.
Nevertheless, interest rates have already been slashed by a cumulative 135bp throughout the whole of last year and fiscal policy has also turned more supportive. The lagged impact of policy loosening should become even more evident over the coming months.
Meanwhile, all of this will help to boost the prospects for local manufacturers and, in turn, help support a gradual recovery in GDP growth in 2020, Capital Economics further noted in the report.
