Apr 02, 2012, 02.46 PM | Source: Reuters
The expansion of India's factory sector slowed for a third month in March as growth in new orders eased and costs for raw materials kept rising, a business survey showed on Monday.
The HSBC manufacturing Purchasing Managers' Index (PMI), compiled by Markit, eased to 54.7 in March from 56.6 in February. In January, the PMI reading was 57.5.
The index has now stayed above the 50 mark - which shows growth rather than contraction - for three years. But with many of its components in a steady decline, that picture may change.
The survey's factory output index slipped to 56.3 in March from 60.5 in February, well below its life-time average of 58.9.
"Activity in the manufacturing sector expanded at a slower pace in March led by a moderation in output and order growth, although export orders accelerated," said Leif Eskesen, economist at HSBC.
Price pressures also continued to rise, with the sub-index for input prices, or the cost of raw materials, increasing from February and staying well above its long-term average.
But output prices eased a little in March, after hitting an 11-month high in February.
"While inflation of output prices eased, a further rise in input price inflation suggests it could pick up again as cost pressures are passed on to customers," Eskesen added.
India's headline inflation, as measured by the wholesale price index, picked up in February for the first time in five months, trumping chances for a reversal in the hawkish monetary stance of the Reserve Bank of India (RBI).
The RBI's battle against inflation has resulted in numerous rate hikes since late 2010, taking the benchmark repo rate to a three-year high of 8.5%, even though it has tried easing liquidity conditions by reducing the amount of cash banks must park with the central bank.
Those rate hikes, along with a deteriorating global economic climate resulted in slowing the Indian economy and choking the investment cycle.
The economy grew at a lower than expected 6.1% rate in the third quarter of last year, and with inflation cooling in past months, markets had been clamouring for the central bank to cut interest rates.
But that may depend on how fast inflation cools, Eskesen said.
"These numbers suggest that upside risk to inflation remains and that the RBI's easing cycle, in terms of timing and magnitude, depends on the extent to which these risks materialize."