Thursday, September 30, 2010

Manufacturing index falls again, still in expansion

India\'s manufacturing sector continued to expand although at a considerably slower pace than in preceding months, predominantly weighed down by a fall in new orders and output.

The HSBC Markit Purchasing Managers\' Index, based on a survey of 500 companies, slid to 55.1 in September, which marks the lowest reading since November last year, from 57.2 in the August survey.

Though the key index for manufacturing in Asia\'s third largest economy has slipped, this was the 18th consecutive month it has remained above the 50 mark that divides growth from contraction.

\"The manufacturing sector shows signs of cooling after a red-hot pace earlier in the year,\" Frederic Neumann, co-head of Asian Economics Research at HSBC, said in a release.

\"Capacity constraints may be partly responsible for this, in addition to the fading fiscal stimulus.\"

While indexes for both new orders and output signalled a sustained expansion in new business and improvement in economic conditions, they were also amongst the biggest losers with each falling to below 60 for the first time since late last year.

But output was at a still robust 58.4, down from August\'s 62.3, and slightly slower than the long-run average for the series.

The general easing of figures from the elevated levels seen in the first half of this year underlines the minor slack in the industrial sector but isn\'t enough to allay fears of persistent price rises with both input and output indexes above the 50 mark.

The Reserve Bank of India projects headline inflation to ease to 6% by March, when the current financial year ends, from 8.5% in August, but noted in its September policy review that food prices continued to contribute to inflationary pressures.

The central bank last raised its repo rate, at which it lends to banks, on Sept. 16 by 25 basis points to 6%. Analysts expect another quarter-point rise by the year end.

\"Growth remains solid and the monetary authorities cannot afford to let down their guard just yet,\" Neumann said.

According to the PMI survey, input cost inflation accelerated to its strongest in four months as raw material prices rose, while output costs, though on an upward trend, remained tempered due to strong competition for new business.

Despite sustained sharp rises in both new orders and output, the employment index remained muted with the index reflecting a small contraction for the third successive month with many respondents indicating that staffing levels were mostly unchanged since August.

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