Home / Markets / Mark To Market /  Will Omicron throw a spanner in the wheel of recovery?

Business activity in India’s manufacturing sector continues to rebound. Latest data published by IHS Markit showed that India’s Purchasing Managers’ Index (PMI) grew in November at the fastest pace since February to 57.6. This measure stood at 55.9 in October. What’s more, the headline figure for November was well above its long-run average of 53.6.

A reading above 50 indicates expansion and anything below the threshold points to a contraction.

Companies scaled up input buying, leading to the second-quickest accumulation in stocks of purchases since data collection started nearly 17 years ago, the survey report said. According to manufacturers, strengthening demand, improving market conditions and successful marketing boosted sales in November. Further, the new orders sub-index and the output sub-index of the PMI saw sharp improvement in November. Another bright spot was that the hiring activity among manufacturers improved after three successive months of downturn.

Fading hope
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Fading hope

Yet, the overall level of positive sentiment among manufacturers about future business prospects slipped to a 17-month low, showed the survey report. Moreover, firms were concerned that inflationary pressures could dampen demand and restrict output in the year ahead.

According to the survey findings, cost inflationary pressures remained intense amid transportation issues and difficulties among suppliers to source raw materials. Note that input prices increased at a rate that was broadly similar to October’s 92-month high.

While manufacturers are passing on the burden of increased costs to consumers, the quantum of price hikes is moderate. But inflationary pressures are now well-known.

In addition to that, another concern has emerged in the form of the Omicron variant of covid-19.

Understandably, economists note that since this survey was conducted before the new variant was identified as a threat, there are downside risks to manufacturers’ optimism.

“Looking ahead, the outlook is clearly mired in uncertainty given the newly-emerged Omicron strain of coronavirus. For many emerging markets, including India, where vaccine coverage is still low, the key question is whether the new strain proves more transmissible and deadly. If it is, then policymakers may eventually be forced to tighten containment measures, which would set back the recovery yet again," Darren Aw, Asia economist at Capital Economists Ltd said in a report on 1 December.

This is true not only of manufacturers, but service providers as well, and it would eventually weigh on India’s overall gross domestic product (GDP) growth in FY22.

Data released on 30 November showed that India’s September quarter GDP grew 8.4%, helped by the gradual reopening of the economy as the impact of second covid wave started to ease and the pace of vaccinations rose.

That said, investors should note that this rebound comes on the back of a favourable base in the same period last year when GDP contracted by more than 7%.

True, the trend in recent high frequency data suggests that growth has picked up in the December quarter, pointing to a broad-based recovery. It should be noted that as of now, no new mobility restriction has been implemented.

“The country’s return to normal still has room to run, but extrapolating the huge post-Delta rebound is a fool’s errand. To be sure, it’s far too soon to say whether the discovery of the Omicron variant will further cloud the near-term outlook. That said, India arguably faces a more immediate risk of an Omicron outbreak, even if its immune escape is only somewhat higher," Miguel Chanco, senior Asia economist at Pantheon Macroeconomics said in a note on 1 December.

Needless to say, a direct fallout of rising inflation and slowing growth will be on the Reserve Bank of India’s monetary policy decision, which is due on 8 December.

It should be noted that central banks in other Asian economies have started to raise interest rates and the clamour for monetary policy normalization is getting louder in India as well.

“We see gradual policy normalization as par for the course, and maintain our view of a 40 basis points (bps) reverse repo rate hike at the December meeting, and a cumulative 75bps of repo and reverse repo rate hikes in 2022," economists at Nomura Global Markets Research said in a report.

One basis point is one hundredth of a percentage point.

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