Business activity in India's manufacturing sector registered a slight improvement in July, aided by sales growth which in turn boosted production.
The Nikkei India Manufacturing Purchasing Managers’ Index (PMI), published by IHS Markit, rose from 52.1 in June to 52.5 in July. A figure above 50 indicates expansion, while a reading below signals contraction. Though the latest reading was slightly higher than the average for calendar year 2018 of 52.3, it remained below the long-run trend of 53.9.
However, going ahead, Indian goods producers predict output growth, with optimism boosted by advertising efforts and hopes of a pick-up in demand. As a result, the overall level of confidence was at a four-month high.
Apart from this, a key factor that is aiding sentiment among Indian manufacturers is the expectation of further monetary easing. Pollyanna de Lima, Principal Economist at IHS Markit, said, "Survey participants linked the uptick in growth to a pick-up in demand, mostly stemming from successful marketing efforts, competitive pricing and favourable public policies. We see from underlying data that the domestic market provided the main impetus to sales growth."
"The relatively negligible increases in input costs and output charges, signaled by the PMI survey in July, suggest that we will likely see a further reduction in India's benchmark interest rate as the RBI continues its effort to support economic growth," she added.
In the backdrop of low inflation and subdued consumption demand, the Reserve Bank of India (RBI) is expected to cut interest rates for the fourth time in a row at its meeting on 7 August. A slew of economists have forecast a 25 basis points rate cut this time. One basis point is one hundredth of a percentage point. India's inflation has remained below the central bank's medium-term target of 4% for almost a year.
The release of PMI data coincides with the US Federal Reserve announcing the much-anticipated 25 basis points rate cut for the first time since global financial crisis of 2008. With that, the global trend of loose monetary policy is expected to continue. However, it should be noted that these efforts to boost global economic conditions would take time to yield the desired results.