India’s PMI jumps 53.0 in July, marking a 14-month high

Among other positive developments in the economy.

On the positive end, the underlying trends of factory output and infrastructure index have stabilised in the past four months with regard to India’s economy, as July PMI jumped to 53.0 –14-month high - from June’s 51.5.

According to a research note from DBS Group Research, June CPI and WPI inflation eased to 7.3% in June (vs May’s 8.3%) and 5.4% (vs May’s 6.0%).

Core CPI also pulled back in the month, reflecting the impact of tight monetary and fiscal policies.

At the same time, the government signalled its commitment to fiscal consolidation, albeit details on the roadmap and direction on subsidies are still awaited.

The report noted that it is early to factor in rate cuts given risks to the inflation outlook.

Here's more from DBS Group Research:

Firstly, part of the fall-off in June inflation was on base effects. On sequential annualised basis, the underlying trend ticked up in the month on higher fruits and vegetable prices.

The year-on-year readings will be distorted by base effects, keeping CPI low near 7.0% in Sep14 and Dec14 quarters and back above 8% by Mar15.

Secondly, the monsoon shortfall has narrowed from over 40% in early July, to below 25% by late-July.

Nonetheless it is important for rains to maintain strength and spatial distribution into August to support agri output.

Above 20% rainfall deficiency is still close to 2009 levels.

So far, the policy response from the government has been positive by way of measures to curb speculative interests and extend budgetary support.

But the short-term relief will be insufficient to fully offset the impact of below-normal rains.

An unexpected rebound in global fuel prices on geopolitical risks and lagged impact of higher freight rates, also pose risks to inflation.

Finally, recent PMI price sub-indices have been edging up after a stable start to the year.

July PMI, out on Friday, saw input prices rise by the fastest pace in four months and led manufacturers to pass on higher costs.

This upturn suggests that the slack in the economy is fast narrowing, which accompanied by higher aggregate demand could fuel price pressures anew.

The central bank is likely to acknowledge positive fiscal developments and softer inflation, but with an eye on potential risks to the price trajectory.

Also notable is the tail risk from an earlier-than expected US Fed’s push to hike rates, which can revive uncertainty.

In light of these factors, we expect the RBI to keep rates on hold in August and rest of the year.