Slip in domestic, external demand slam India's PMI rise

The PMI improvement to 55 in June suggests an expanding manufacturing sector, but dip in new export orders and domestic new orders suggest that demand remains subdued, says Nomura.

India‟s manufacturing PMI rose to 55 in June from 54.8 in May, led by a higher output index, suggesting that the manufacturing sector remains in an expansion zone. However, the details were not very encouraging. Both the new export orders (54.3 in June versus 56.2 in May) and domestic new orders (58.5 vs. 59.6) indices fell, suggesting that domestic and external demand remains subdued.

Here's more from Nomura:

Inventory of both raw material and finished goods rose in June, as firms‟ anticipate higher demand. As a result, the new orders to inventory ratio fell to 1.11 in June from 1.16 in May, which suggests there may be a fall in the PMI reading next month.

Meanwhile, inflationary pressures continue to intensify: both the input (65.1 in June from 64.2 in May) and output price (59.5 from 58.7) indices rose, remaining above their historical averages. The sharp jump in the output price index was particularly steep, suggesting that firms‟ are passing on the higher costs due to rupee depreciation
to consumers, despite weaker demand.

Bottom-line: demand remains weak, though we do not believe it plummeting as suggested by industrial output data, while inflationary pressures remain strong. With weak monsoons also likely to add to food inflation pressures, we do not see room for rate cuts in the near term.