beyondbrics

Manufacturing in India picked up in December on the back of a rise in new orders, a brighter note amongst other Asian economies’ data.

According to PMI figures released by HSBC and Markit, December’s 54.2, up from 51.0 in November, was comfortably above the 50 benchmark that separates growth from contraction and represented the highest monthly rise since April 2009. The question now is: when will India start to bring interest rates down?

Economists said the higher number was a sign that things were perhaps not quite as bad as recent disappointing GDP growth and IP data had suggested, but that it would not be enough to cause the Reserve Bank of India to begin reversing immediately the monetary policy tightening cycle it has been in engaged in since March 2010 just yet.

While RBI governor Duvvuri Subbarao told the BBC on Monday, “From here on we could expect reversal of monetary tightening,” he added that it was “difficult to say when that will take place and in what shape it will roll out”.

The bank had paused on interest rates at its December meeting as it became clear, with GDP growth down below 7 per cent for the quarter ending in September – its slowest rate in more than two years – that monetary tightening was taking its toll on growth.

Monday’s figures were driven by a rise in output and new orders – “the latter was partly led by a pick up in overseas demand, with export orders rising at a faster clip (54.1 vs. 50.4 in November)”, according to HSBC.

This from Leif Eskesen, India economist for HSBC:

The latest PMI survey brings some relief with regards to growth. The momentum, it seems, is at least stronger than suggested by the official and more dated industrial production data.

The December survey shows that domestic demand is providing solid support for activity on the ground. Moreover, the rise in overseas orders suggests that conditions for export oriented industries are maybe not quite as dire as feared.

As beyondbrics reported, government data released last month revealed that the India’s once-robust industrial production had shrunk a staggering 5.1 per cent in October, the biggest contraction since March 2009.

But HSBC’s December numbers painted a slightly rosier picture: total new orders rose to 57.9 from 50.4 in November, while output stood at 55.8, up from 50.5 in November.

Employment in the sector, meanwhile, jumped to 50.4, versus 48.6 in November, the first growth figure for the category in five months.

But, alas, it wasn’t all good news: inflation readings, according to HSBC, were “not encouraging”, with input price increases barely easing to 62.7 from 63.1 in November, and output prices rising to 56.2 from 55.4 in November.

With those figures in mind, and the fact that inflation remained above 9 per cent in November, the RBI can’t switch its priority to growth immediately, according to Eskesen:

As for the RBI, the numbers suggest it is too early to replace inflation with growth as the key policy concern. The strength in demand is continuing to provide firms with the ability to pass on cost increases and at an accelerated pace. A rate cut is, consequently, not just around the corner. There first have to be clear signs that core inflation pressures, and not just headline, is moving in the right direction on a sustained basis.

Jairaj Pudandare, former regional managing director at PricewaterhouseCoopers, told beyondbrics that while he didn’t expect a rate cut at January’s policy meeting, he wouldn’t be surprised to see it in the first quarter of 2012.

“The fact is that the cost of funds have gone up so much [due to high inflation and a weak rupee] it’s difficult to do business,” he said. “So over the next 9-to-12 months we’ll see that reversed and I think the RBI will take steps in the next two or three months [to begin the reversal process].”

Meanwhile, Subbarao seemed to give the central bank a wide enough window in which any reversal might take place, saying, “I think the balance between growth and inflation will shift in 2012.”

Related reading:
India: at last, food prices ease, beyondbrics
India set to launch infrastructure push, FT
India: Delhicately poised, FT
India: rates paused, peak likely reached, beyondbrics