Home / Markets / Mark To Market /  Manufacturing PMI: Inflation’s ugly comeback is an outcome of ultra-easing

Business activity in India’s manufacturing sector continued to recover in December aided by domestic demand. IHS Markit’s Manufacturing Purchasing Managers Index (PMI) rose from 56.3 in November to 56.4 in December. A reading of above 50 indicates an improvement and below this threshold indicates contraction.

But the recovery in the headline data comes in the backdrop of sharp rise in input cost inflation. The PMI sub-index tracking this metric has hit a 26-month high in December. Those surveyed have noted increased prices for chemicals, metals, plastics and textiles. “A worrying development remains higher input prices, which may add to output prices in coming months, especially as demand conditions normalise," Rahul Bajoria, chief India economist at Barclays said in a report on 4 January.

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According to the PMI survey report, output charges were lifted in response to rising cost burdens, but here the rate of inflation was only marginal.

Market experts say this is among the fall-outs of massive liquidity injection by global central banks.

“The response to the global pandemic was to provide financing through loan guarantees and green asset financing by the government. We have had quantitative easing programs since 2008, but we have not seen inflation in goods and services because banks were not lending money. This meant that an increase in the money supply did not make it into the real economy. Today, however, after experiencing an economic shock caused by COVID-19, the government response has led to money reaching the real economy," ex-India fund manager Ritesh Jain said in his latest blog.

Sharing a similar view, Althea Spinozzi, fixed income strategist at Saxo Bank said, “Overly accommodative monetary policies have been central banks' medicine of choice to support an economy struck by the Covid-19 pandemic. The only problem: the side effects start showing. A rise in inflation, higher interest rates and a spike in corporate defaults are key risks which may spur directly from excessively easy monetary policy."

Meanwhile, Indian manufacturers maintained an upbeat view that output will increase in the coming year. However, the degree of optimism weakened to a four-month low as some firms were concerned about the lasting effect of the cov-19 pandemic on the global economy, said the survey report.

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