July factory PMI rises, output up sharply

Indian manufacturing expansion picked up pace in July, driven by new orders, stronger factory output and rising prices even as hiring stagnated, a survey showed on Monday.

The HSBC Markit Purchasing Managers’ Index, based on a survey of 500 companies, edged up to 57.6 in July from 57.3 in June when it slipped from a multi-year high.

This marked the 16th consecutive month this key index of manufacturing in Asia’s third largest economy has been above the 50 mark that divides growth from contraction.

The factory output index jumped to a four-month high of 62.3 in July from 60.5 in the prior month, pointing to a rate of expansion in production that was above the trend since the end of the financial crisis, according to survey compilers Markit.

“India is on a roll. The economy was given another leg up in July as new orders continued to pour in. Even the export sector appears to be holding up well, despite worries over cooling demand abroad,” said Frederic Neumann, co-head of Asian Economics Research at HSBC, in a release.

But Indian manufacturers shed jobs for the first time in four months in July.

New business growth remained robust, driven by domestic orders, with the orders index holding firmly above 60 since the start of this year. The new export orders index signalled expansion for 14 straight months.

But price pressures have shown no sign of slackening despite a series of interest rate rises from the Reserve Bank of India (RBI) and the latest PMI data showed that trend is continuing.

Official wholesale inflation, the most closely watched measure of price pressures, accelerated to 10.55 per cent in June from 10.16 per cent in May.

Fuel inflation crept up in mid-July. The recent hike in petrol prices coupled with a risk of further adjustments to the presently-subsidised kerosene and diesel rates threaten to push headline inflation even higher.

“The central bank will need to apply the brakes more forcefully and dampen demand with further interest rate hikes,” said HSBC’s Neumann.

However, policymakers hope good monsoon rains, crucial for the farming sector and the whole economy, will help subdue soaring inflation.

Last week the central bank lifted the repo rate, the rate at which it lends to banks, by 25 basis points to 5.75 per cent, and pushed up the reverse repo rate , used to absorb excess cash, by 50 basis points to 4.50 per cent.

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