Macro Matters | The Monetary Policy Committee should take into account the rise in manufacturing PMI in May

At a time when the Monetary Policy Committee is in a huddle to decide whether to cut the policy rate further and when the clamour for a big rate cut and a fiscal stimulus is fast becoming a crescendo, the Nikkei India Manufacturing Purchasing Managers’ Index (PMI) for May is signalling that the manufacturing sector is looking up.

The manufacturing PMI for May came in at 52.7, rebounding from the 51.8 level it was at in April. New orders, new export orders, employment as well as business sentiment in the manufacturing sector all picked up. Particularly heartening was the fact that the rise in new orders was broad-based across consumer goods, intermediate goods and capital goods makers. Strengthening demand conditions was mentioned as a factor for the rise in output. Also, as Pollyanna De Lima, Principal Economist at IHS Markit said, ‘Goods producers were also able to charge competitive prices due to negligible increases in their cost burdens, meaning not only higher sales in the domestic market, but also greater overseas demand.’

Three indicators suggest that the improvement in momentum could be sustained: inventory depletion, which means that firms will seek to replenish stocks soon, the rise in new orders and the improvement in business sentiment. That indicates a need for caution by the MPC while debating the need and extent of the monetary stimulus.

The rise in the Manufacturing PMI for May, however, doesn’t mean that manufacturing is out of the woods. The chart shows that the manufacturing PMI readings for January and February 2019 were higher than the May reading and yet the growth in manufacturing at constant prices during the March 2019 quarter was a mere 3.1 percent, according to the GDP data.