Why the latest manufacturing data boosts case for another RBI rate hike

Reserve Bank of India Governor Shaktikanta Das has already signalled a rate hike in the Monetary Policy Committee’s meeting next week. And those hoping the hike to be benign will be disappointed with the latest high-frequency data—S&P Manufacturing Purchasing Managers’ Index.

India’s seasonally adjusted Manufacturing PMI was at 54.6 in May, compared with 54.7 in April. This pointed to a sustained recovery across sectors as companies were able to secure new work despite lifting selling prices at the fastest rate in over eight-and-a-half years.

Any reading over 50 shows expansion in activity and now that India’s manufacturing PMI has stayed above that level for the eleventh time in as many months, it does give confidence to the RBI to opt for another rate hike next week.

S&P also pointed out that, unlike earlier, companies are increasingly passing the rise in raw material costs to customers. 

“Companies were able to secure new work despite lifting selling prices at the fastest rate in over eight-and-a-half years as additional cost burdens continued to be transferred to clients,” it said.

Resilient growth

Demand showed signs of resilience in May, improving further in spite of another uptick in selling prices.  Companies reported a marked increase in total new orders that was broadly similar to April.

May data also highlighted a notable uptick in growth of new export orders. The rate of expansion was sharp and the fastest since April 2011.

Amid reports of new business gains, sustained improvements in demand and looser COVID-19 restrictions, manufacturers continued to scale up production in May. The rate of growth was marked, above trend and broadly in line with that recorded in April, S&P said

Inflation signals

Indian manufacturers signalled a further increase in output prices halfway through the first quarter of fiscal year 2022-23. Having accelerated to the fastest in over eight-and-a-half years, the rate of inflation was marked.

According to panellists, additional cost burdens were shared with clients. Input costs rose for the twenty-second successive month in May, with companies reporting higher prices for electronic components, energy, freight, foodstuff, metals and textiles, S&P said.

Although softer than in April, the rate of inflation remained historically elevated. Goods producers stepped up input purchasing in May, thereby stretching the current sequence of expansion to 11 months. Moreover, the rate of growth was sharp and the quickest since last November. Where an increase was signalled, survey participants cited ongoing sales growth and rising production requirements.

Inventory, jobs

Although some firms indicated a further lengthening of supplier delivery times in May, the vast majority of companies reported no change in vendor performance from April. As a result, there was only a marginal increase in lead times. Indeed, firms signalled an upturn in pre-production inventories.

The accumulation was the eleventh in as many months. In contrast, holdings of finished products decreased further in May. The latest fall was only marginal, however, and the slowest in the current 58-month sequence of depletion.

Manufacturing sector jobs rose further in May, owing to ongoing improvements in sales. Although only slight, the rate of employment growth picked up to the strongest since January 2020.