India's manufacturing output jumps to 57.7

Activity momentum is on its way.

According to Nomura, output rose sharply and inventory levels recovered: Encouragingly, the output sub-index jumped up to 57.7 in December from 55.4 in November, a sequential pick-up suggesting that underlying momentum in manufacturing activity has improved.

Here's more from Nomura:

The finished goods inventory sub-index also picked up, to 48.1 in December from a near four-year low of 45.3 in November, although it remains below the contraction-expansion threshold of 50.

Demand indicators are encouraging: Adding to our optimism, the new orders sub-index jumped to 58.0 in December from 55.8 in November while the new exports order rose to 56.4 from 55.9, suggesting brighter demand prospects.

Interestingly, the sharper increase in new orders suggests a strong pick-up in domestic demand. Consequently, the new orders to finished goods inventory ratio remained high at 1.21, above the Jul-Oct average of 1.08. Low levels of finished goods inventory suggest restocking demand will grow in coming months.

Supply constraints continue: The backlog of work index rose to an all-time high of 56.5 in December as firms could not respond to higher demand due to persistent powercuts and labour shortages.

Price pressures ease: The input price index eased slightly to 59.6 in December from 60.0 in November, while the output price sub-index ticked lower to 55.9 from 56.0 in November.

Still, companies reported continued price pressure due to renewed INR depreciation in the past few months, higher raw material costs and stronger demand. With the output price index down just a tick, after a three point rise in November, we believe that there may be some payback in WPI-core inflation in December, which had eased to 4.5% y-o-y in November.

Overall, today‟s PMI data indicates that manufacturing activity likely bottomed out in Q3 2012 and began to pick up in Q4. Some of the output rise could be restocking demand as supply shortages are increasing backlogs.

As such, the demand-supply gap seems to be widening again. On the price front, overall inflationary pressures remain under check for now, but with demand starting to rise and supply seemingly failing to keeping pace, inflationary pressures could start to rebuild in H2 2013.