Will April factory output data weigh on RBI to lift rates?

The Reserve Bank of India has kept interest rates on hold for the past 11 monetary policy meetings, despite calls from some quarters for an increase to shift its focus from supporting economic growth to controlling inflation.

A new set of data released on Monday now shows that growth, at least in the manufacturing sector, remains strong but inflationary pressures are intensifying due to rising commodity prices, the Russia-Ukraine war and greater transportation costs.

The seasonally adjusted S&P Global India Manufacturing Purchasing Managers’ Index (PMI) stood at 54.7 in April from 54.0 in March, signalling an improvement in factory output.

The manufacturing sector, which accounts for a quarter of economic output, had rebounded last year after slumping during the months-long lockdown in 2020 and remained in growth mode last year as well as during the third wave of the pandemic earlier this year. April’s data shows that business conditions in India improved in April, too.

Pollyanna De Lima, Economics Associate Director at S&P Global, said: “The Indian manufacturing PMI remained well inside positive territory during April, recovering some of the ground lost in March.”

Production, New orders

According to the survey, the lifting of COVID-19 restrictions continued to support demand. The rate of new order growth was marked, above trend and faster than that seen in March.

The rate of output growth also quickened in April and outpaced its long-run average. Moreover, the latest rise in production took the current sequence of uninterrupted increases to ten months. Growth gathered momentum in the intermediate and capital goods segments, but there was a slowdown at consumer goods makers.

April data also showed a rebound in new export orders, following the first contraction for nine months in March. The rate of increase was solid and the strongest since last July, the survey showed.

“Factories continued to scale up production at an above-trend pace, with the ongoing increases in sales and input purchasing suggesting that growth will be sustained in the near-term,” said De Lima.

Inflation concerns

Manufacturers reported another increase in input prices at the start of fiscal year 2022-23. In fact, input prices increased at the fastest pace in five months, while output charge inflation hit a 12-month high.

Firms signalled a further upturn in input costs during April, with chemical, electronic component, energy, metal, plastic and textile costs reportedly higher than in March.

Increases were partly attributed to rising transportation fees and the war in Ukraine. Additional cost burdens continued to be shared with consumers in April, as evidenced from another increase in selling prices.

“A major insight from the latest results was an intensification of inflationary pressures, as energy price volatility, global shortages of inputs and the war in Ukraine pushed up purchasing costs,” De Lima said.

“Companies responded to this by hiking their fees to the greatest extent in one year. This escalation of price pressures could dampen demand as firms continue to share additional cost burdens with their clients,” she added.

Business confidence, payroll

There was some improvement in business confidence at the start of fiscal year 2022/23. However, the overall degree of optimism remained subdued by historical standards. Some firms foresee further improvements in demand and economic conditions, while others noted that the year-ahead outlook was difficult to predict.

The survey continued to show a lack of pressure on firms' operating capacities alongside only mild job creation. Moreover, expectations regarding growth prospects remained subdued.

With capacity pressures among Indian manufacturers remaining negligible, shown by a marginal rise in backlogs, there was only a mild increase in employment during April. Indeed, the vast majority of survey participants reported unchanged workforces from March's levels, according to the survey.

Inventories, backlogs

Notwithstanding supplier price hikes, and in tandem with ongoing improvements in demand, firms purchased additional inputs in April. The upturn was sharp and the most pronounced since last November.

This contributed to a further increase in input inventories among goods producers. The rate of stock accumulation was sharp and the fastest in four months.

On the other hand, holdings of finished products continued to fall as companies used existing stocks to meet delivery schedules. Post-production inventories decreased at a moderate pace that was the weakest in over three years.

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