India manufacturing PMI slips from 27-month peak reading

After hitting a 27-month peak of 59.0 in May, the seasonally adjusted HSBC Purchasing Managers’ Index (PMI) – a headline index designed to measure the overall health of the manufacturing sector in India – slipped to 57.3 in June. Nevertheless, the latest reading remained above the series average to signal another marked improvement in the health of the industry. The PMI has now signaled expansion for 15 successive months.

Indian manufacturers sharply raised production during June, primarily in order to accommodate a similarly considerable increase in new business. Reports suggested that favorable economic conditions and good company reputations had supported demand. Although new export order growth accelerated since May, the expansion of total new work remained much more pronounced.

As workloads increased in June, so did volumes of outstanding business. Backlogs of work accumulated markedly, which panel members also linked to delays caused by power cuts. Despite a faster build up of unfinished work, manufacturers did not add to payrolls during the latest survey period. Overall employment levels were unchanged, with the vast majority of companies (approximately 96 percent) maintaining staffing numbers on the month.

Input acquisitions made by Indian manufacturers rose for the 15th month running in June, and at a substantial rate. Respondents stated that higher buying activity reflected greater workloads and efforts to rebuild pre-production inventories. Consequently, stocks of purchases grew markedly, albeit more slowly than in May.

Stronger demand for inputs led to another deterioration in average vendor performance at the end of Q2. Lead times on input deliveries to Indian manufacturers lengthened modestly, but to a lesser degree than in the previous month.

Inflationary pressures moderated in June – sharply in the case of input prices (the respective index dropped by over ten points since May). As a result, purchasing costs rose at the mildest pace for a year. In the 15 percent of cases where input prices increased, panelists mentioned higher raw material and fuel costs. The slowdown in charge inflation, which reflected the more subdued rise in input costs, was less pronounced. Factory gate prices rose modestly and at the weakest rate since February.

Commenting on the India Manufacturing PMI survey, Frederic Neumann, co-head of Asian Economics Research at HSBC, said: “India's economy is stepping back a little, with output growth easing into June. Notably, the pace of hiring has slowed among manufacturing firms as the total new order flow begins to cool. This, too, reduces price pressures a little, with both the input and the output components signaling decelerating inflation. Overall, however, both activity and price components are easing from very elevated levels, suggesting that it is too early to worry about growth and let down our guard on underlying price trends.”