Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

The implications of the rise in manufacturing PMI for monetary policy

The MPC will also notice that the New Exports sub-index is very robust, indicating that the depreciation of the rupee is paying dividends

When the Reserve Bank of India’s monetary policy committee (MPC) meets this week, it will be considering implications of the Nikkei India Manufacturing Purchasing Managers’ Index for September.

There are several points to consider. First, manufacturing activity has improved, with the headline index moving up from 51.7 in August to 52.2. Any reading above 50 indicates expansion from the previous month. That will boost the case for a rate hike.

The MPC will also notice that the New Exports sub-index is very robust, indicating that the depreciation of the rupee is paying dividends.

On the flip side, though, the rupee depreciation is showing up in higher input prices, aided by rising crude oil prices.

According to the survey report, rising prices continued to weigh on sentiment as a strong dollar and supply shortages exacerbated high global prices for steel and fuel.

This has in turn led to some increase in output prices as part of the higher costs are passed on, but the rise in output prices is well below the rise in input costs. That means corporate margins are being squeezed.

Indian manufacturers are confident that the manufacturing sector’s output will continue to rise, but the accelerating input cost pressures are taking a toll on their optimism about the future.

As the chart alongside shows, in the backdrop of constantly rising input prices, and limited ability to pass them on, the Future Output Index has slipped to the lowest level since June. That is unsurprising, given the macro concerns that have come to the fore in recent weeks.

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