Indian manufacturing activity accelerated strongly in August with the sector expanding at its fastest pace in nine months, reflecting strengthening demand conditions and a revival of inflationary pressures.
While August was a turbulent month on financial markets due to credit worries related to the US subprime market, the ABN Amro Bank purchasing managers’ index (PMI) signalled the strongest improvement in Indian manufacturing operating conditions since November. It rose to a seasonally adjusted 57.9 from 52.9 in July, when it touched its lowest in 28 months.
“The resurgence was driven by solid pick-up in the level of new business and overall output,” said Gaurav Kapur, a senior economist at ABN Amro Bank.
The PMI, compiled by UK-based NTC research and sponsored by the Dutch Bank, tracks changes in manufacturing business conditions by polling 500 companies each month on output, new orders, employment and prices. The series began in April 2005.
A reading above 50 signals expansion while readings below 50 suggest contraction.
The PMI hit a peak of 59.3 in October 2006 but has been declining since then as the central bank tightened its policy to cool price pressures in Asia’s third largest economy, which grew an annualized 9.3% in the April-June quarter.
The central bank has raised its key short-term lending rate five times since June 2006 and also increased banks’ reserve requirements by 200 basis points since December.
The new orders index rose sharply to 64.8 in August from 55.7 in July. The new export orders index climbed to 54.9 in August from 51.3 in July. The output index rose to 60.7 in August, a nine-month high.
“These indicators seem to suggest that the contractionary impact of interest rates on local demand conditions, especially leverage-driven spending, could be on a decline,” Kapur said.
Input price inflation accelerated sharply in August due to strong demand for raw materials including paper, metals and food items, but companies were able to pass on higher manufacturing cost to consumers.
The input price index rose to 57.8 in August from 51.5 in July. The output price index rose to a 10-month high of 52.6 in August from 51.1 in July.