Manufacturing PMI slips in August to 56.2, as inflation worries subside

For the 14th consecutive month, India’s manufacturing PMI for August was above 50 at 56.2.

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Although S&P Global’s Purchasing Managers’ Index (PMI) dipped to 56.2 from the eight-month high of 56.4 registered in July, India’s manufacturing activity rose once more in August.

A reading above 50 denotes increased activity, while a print below 50 suggests decreased activity.

The manufacturing PMI has now printed at least 50 for fourteen consecutive days.

“A sustained improvement in demand conditions boosted new order intakes at Indian manufacturers during August, which in turn pushed output growth to a nine-month high,” S&P Global said.

“Production volumes were also supported by a pick-up in exports and upbeat projections for the year-ahead outlook. Firms were at their most optimistic for six years” they added.

Considering that analysts predict that global GDP will quickly weaken and that several wealthy economies would enter a recession, a positive forecast for overseas demand is puzzling.

Businesses that participated in the survey also indicated optimism about prices.

“Firms welcomed the weaker increase in input costs with and upward revision to output forecasts amid renewed hopes that contained price pressures will help boost demand,” noted Pollyanna De Lima, Economics Associate Director at S&P Global Market Intelligence.

“Inflation concerns, which had dampened sentiment around mid-year, appear to have completely dissipated in August,” De Lima added.

According to S&P Global’s study, cost inflation decreased to a one-year low in August as a result of the downturn in commodity prices, especially those of steel and aluminium. As a result, the increase in selling prices was relatively marginal.

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) had to increase the policy repo rate by 140 basis points to 5.4 percent in just four months due to high inflation, so the easing of pricing concerns will be music to their ears.

Although the Consumer Price Index (CPI), the primary indicator of inflation in India, eased to a five-month low of 6.71 percent in July, it has remained above the medium-term target of 4 percent for 34 straight months and has also spent seven consecutive months above the 6 percent upper-bound of the central bank’s 2–6 percent tolerance range.

If average CPI inflation falls outside of the 2–6% range once more in July–September, as predicted by the RBI, the central bank will not have achieved its inflation goal.

The MPC is expected to announce a couple more rate hikes to bring the repo rate to roughly 6% by the end of 2022 at its upcoming meeting on September 28–30.