Factory output growth slips; All eyes on RBI for rate cut

Manufacturing sector grew at a slower pace in August as order flow turned sluggish and forced the companies to cut prices, a business survey showed on Tuesday, adding to the clamour for interest rate cut by RBI. The Nikkei India Manufacturing PMI - a composite monthly indicator of manufacturing performance - stood at 52.3 in August, down from a six-month high figure of 52.7 in July, indicating a slower pace of growth in the sector. A figure above 50 represents expansion while one below means contraction.

A sharp increase in buying levels along with drop in stocks of finished goods, however indicated that output growth may rebound in the coming months. "Growth of Indian Manufacturing production waned in August on the back of softer improvements in both domestic and foreign demand. This led firms to keep payroll numbers unchanged during the month," said Pollyanna De Lima, Economist at Markit, which compiled the survey.

On inflation, the survey found that falling global commodity prices resulted in an overall reduction in cost burdens and this would provide companies with more room for price negotiations. "As inflation concerns fade and demand growth loses momentum, further accommodative policy should not be discounted," Lima added. RBI Governor Raghuram Rajan, who has been under pressure from the government and the industry to further cut rates, said this weekend that RBI remains in an "accommodative mode" and would take a decision as per the data on inflation and other macroeconomic factors.

RBI, which has lowered rates thrice so far this year by 25 basis points each, is scheduled to hold its next bi-monthly monetary policy review on September 29. However, two of the three rate cuts this year have been announced outside the scheduled reviews. The GDP data released yesterday by the government also showed the growth rate slipping to 7 percent in the April-June quarter, from 7.5 percent in the preceding quarter.

Besides, the infrastructure sector output growth also slowed down to a three-month low of 1.1 percent in July, further making case for a rate cut by RBI.