The country’s factory growth has hit a two-year low in October because of the slow rise in new orders and output, dragging business confidence to its weakest since early 2017, according to a survey which indicates that more policy easing is likely.
Certainly, the inflation numbers in the PMI survey indicated the RBI has the scope for further policy action as the input prices had declined for the first time in over four years. While firms raised output costs at a faster rate compared to September it is unlikely to push overall inflation above the central bank’s medium-term target of 4 percent. But central bank’s target of 4 percent is not going to exceed although the firms have raised their output cost compared to September.
US-China trade war took a toll on business sentiment, investment, and overall growth and is a cause for the sharp fall in global manufacturing activity.
The Nikkei Manufacturing Purchasing Managers’ Index, compiled by IHS Markit, dropped to 50.6 last month from September’s 51.4, confounding expectations in a Reuters poll for a rise to 51.8.”PMI data for October showed a continuation of manufacturing sector weakness in India, with sales growth softening to the slowest in two years,” noted Pollyanna De Lima, principal economist at IHS Markit.Just the same, it has held above the 50-point threshold mark that separates growth from contraction for the 27th straight month, an uninterrupted run not seen for around five years.
“Weakening demand had a domino effect in the manufacturing industry, knocking down rates of increase in production, employment, and business sentiment.”
The new orders sub-index, a proxy for domestic demand, has fallen to 51.3 from September’s 52.3, its lowest since October 2017. That forced firms to slow the pace of hiring which is a cause for concern for the government as it is already under pressure to create more jobs.
Moreover, in a further sign the ailing economy will take a while to recover, optimism slipped in October to its weakest since soon after 2016 demonetization that affected day-to-day operations of small- and medium-scale businesses.
The downturn in overall business activity and demand suggests that Reserve Bank of India might need to ease policy again, on top of the cumulative 135 basis points of rate cuts delivered this year.
