March factory PMI steady, input costs at series high

March factory PMI steady, input costs at series high

Bangalore: The strong pace of expansion in India’s manufacturing sector steadied in March, helped by sustained new orders and output, while input prices were at their highest in at least six years, signalling further inflationary pressures, a survey showed on Friday.

The HSBC Markit Purchasing Managers’ Index, based on a survey of around 500 companies, was unchanged at 57.9 in March from February, the highest since November.

The key index of manufacturing in Asia’s third largest economy has now been above the 50-mark that divides growth from contraction for two years. “The momentum in India’s manufacturing sector held up well in March, suggesting that growth is not an immediate concern," said Leif Eskesen, chief economist for India & Asean at HSBC.

“Output growth kept up the pace and the inflow of new orders accelerated, holding promise of a continued strong momentum in output in the months ahead."

The index for new orders rose to 64.2 last month from 62.4, its fastest growth since August 2008, reflecting strong demand and favourable economic prospects for the $1.3 trillion economy.

Finance ministry expects the economy to grow 8.6% in the fiscal year that ended on 31 March and 9% in the current year.

The input price index rose to its highest level last month since the survey began in April 2005, propelled by further rises in raw material costs and crude oil prices which have surged 17.6% since the beginning of February.

Tensions in Libya and the Middle East have kept global crude oil prices above $100 a barrel since February and were pushed higher over concerns about the Japanese earthquake and ongoing nuclear crisis at Fukushima.

India’s wholesale price index rose an annual 8.31% in February on higher fuel and manufactured product prices, according to official data.

Supply bottlenecks and further rises in crude oil could push domestic prices higher, beyond the 7% expected by the finance minister for end-March. Output prices in March rose at a much faster than the previous month, the survey showed, as producers passed on rising input costs. Backlogs of work also rose sharply, driven by growth in new orders and capacity constraints.

“Manufacturers are facing ever steeper increases in input costs due to tight labour markets and rising material costs, which are increasingly being passed on to output prices. In turn, this calls for further tightening of monetary policy to tame inflation pressures," Eskesen said.

At its mid-quarter monetary policy review, the Reserve Bank of India (RBI) raised its key policy rate for the eighth time since last March, in a continued campaign to tame inflation that has remained stubbornly above the bank’s 5-6% comfort level and spread into the broader economy.

The RBI will next review rates on 3 May. Further hikes in interest rates over the coming year could hamper growth prospects as firms struggle to cope with the rising cost of capital while boosting productive capacity.