Sharp dip in new orders indicate coming slowdown: JPMorgan

India's manufacturing sector expanded at the fastest pace in four months in June as the country saw improvement in business conditions as well as hiring, an HSBC survey said.

However, Sajjid Z Chinoy, economist (Asia) at JPMorgan says the sharp decline in new orders, which are a reliable indicator of the output in the coming months, point to an impending slowdown.
India's economy grew at an annualised pace of 5.3% between January and March this year -- its slowest pace in nine years and a far cry from the nearly 10% growth regularly clocked before the onset of the crisis in 2008.
The PMI showed consumers continued to be charged high prices for finished goods as input prices rose at the same pace as last month, offering the Reserve Bank of India little room for maneuver.
"We saw that the input prices rose pretty sharply and output prices really surged this month. Output prices are always a good indicator of core inflation in WPI. So my sense is that we should brace ourselves for that core number to go up again," Chinoy told CNBC-TV18 in an interview.
Moreover, Chinoy says, food inflation could surge sharply if monsoon falters. "Headline inflation could remain at the 7.5% mark but that presumes a normal monsoon," he says.  
The RBI unexpectedly kept interest rates on hold at 8% at its meeting last month, as inflation worries persist, placing the onus onto the government to revive the economy.
"For the time being, until there is a sustained moderation or signs of a moderation in both retail inflation and headline wholesale rate, and we don't see something on the fisc, I think the RBI might be inclined to just stay the course for now," Chinoy says. Below is an edited transcript of the interview on CNBC-TV18. Also watch the attached video. Q: You weren’t very enthused by the improvement in the Purchasing Managers’ Index (PMI) tick yesterday?
A: I think the headline number was a bit misleading so we had the headline tick up slightly. People made a big deal about the fact that the PMIs are at a four month high. But the devil was in the details, and if you look at the details closely, things were much more sober. New orders which are the very reliable indicator of output in the coming months have fallen off quite sharply over the last couple of months. Last month, it was domestic orders, this month it was on export orders. So there is no sense that there is going to be any support for manufacturing activity in the coming months are given the trajectory of new orders.
The other piece of news that I found quite disturbing but not unexpected was price behaviour. We saw that input prices rouse sharply which was to be expected and output prices surged this month. The worry is that output prices are always a good leading indicator of core inflation in WPI. So my sense is we should brace ourselves in the coming months to see that core number perhaps move up again. Q: What kind of figures do you think the market generally will have to see on the core inflation figure?
A: I think as long as core inflation figure is slightly above 5%, the market will be pretty relaxed about that. The worry is if this begins to move up closer to 6% that’s the danger zone. There are two sources of concerns here; one is that food inflation has risen again, god forbid we have a bad monsoon and that food inflation number goes up that puts a lot of pressure on wages and there is a lot of anecdotal evidence that wage pressures have risen.
The other real source of pressure is the currency. The fact is the currency has depreciated sharply and that is inflationary in the tradable sector. So when input prices rise because of those reasons in an environment in which capacity is quite constrained across the board the transmission from input prices to product prices or core inflation is both pretty swift. This has been the pattern over the last 18 months that every few months you see pressure on input prices and firms up very happy and willing to pass them on because there is no excess capacity in the system. Q: Where is consensus at right now in terms of inflation ticks for the next couple of months? How much of a surge do you think any movement on food inflation can cause to that figure?
A: Right now, consensus is served in the 7.5% mark to the next couple of months in terms of headline rate but that presumes a normal monsoon. I think for the monsoon distribution is almost more important than overall magnitude.
There are large buffers of food grain stocks and things like rice and wheat shortfalls will be met. The concern is the added food groups; pulses, oil seeds and the worry is that food inflation is already at 10% if you have subpar monsoon that could surge pretty sharply. But let’s not prophecies about doomsday just as yet, July is a very crucial month and if the monsoon makes good progress in the next few weeks perhaps we can avoid that outcome. The good news is that commodity prices globally have come up despite the good news in Europe we see that oil is still pretty range bound and the currency has appreciated. So if commodity prices remain content globally and the currency remains at these levels that will certainly help the Reserve Bank of India (RBI) fight against inflation. Q: The one thing the RBI has been comfortable about is the core inflation figure. How will all these developments including the concerns on the monsoon effect what may happen at the next policy meet? Do you think it will cause them to stay their hand again?
A: They drew a strong line in the sand in the last review. They broadened what they were looking at. It was not just wholesale inflation and core; they were looking at retail inflationary pressures, they were looking at the fact that some progress needs to be made on the fiscal front to ensure there is no large slippage over there. My sense is that if none of these dynamics change and you have got worries about a subpar monsoon, it might be prudent again for the RBI to wait it out in July. Global factors now have become much more supportive.
Our sense is that the currency’s move over the last week has been driven by risk aversion abating globally. If policymakers can push ahead with some of the things that the market are expecting in the next couple of months, I think you could see the rupee appreciate even further. If that happens and crude prices come down all of that will help inflation. But for the time being, until there is a sustained moderation or signs of a moderation in retail inflation and the headline whole sale rate and we do not see something on the fiscal side, I think the RBI might be inclined to stay the course for now. Q: There has been a lot of to and fro activity in the currency. What are your thoughts on it because of the volatility we have seen in the last month?
A: It is and it stems back to some of the measures announced over the last few months to reduce speculative behaviour. Volumes have fallen off very sharply, and therefore, any change in sentiment has had very large gyrations in the currency market. I think the good news on the exchange rate is – when I was here last week we spoke about the fact that before the rupee move the price behaviour in the week before had suggested that the currency was oversold by any yardstick and people almost itching to go long and that did happened. The trigger of course was Europe at the end of the week.
My sense is that much of the move has been because of supportive global factors and that is an opportunity for India because if policymakers in Delhi can do three-four things that market expecting post the presidential election I think the rupee could appreciate even further. Conversely, if there is a policy disappointment then you drift back towards some of the weaker levels. The current account deficit however will be supportive this year with crude prices coming off, with gold imports coming off my sense is that the extent to which we will need capital flows in 2012-13 will be quite substantially lower than the last year and that should be supportive of the rupee.