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Comment | Lower manufacturing PMI strengthens case for 25 basis point rate cut

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Manas Chakravarty

The Nikkei India Manufacturing Purchasing Managers Index is the latest piece of high frequency data on the economy available to the Reserve Bank of India’s Monetary Policy Committee before they take a decision on whether to cut the policy rate further, at their meeting from April 2-4.

The Manufacturing PMI had been showing strong momentum in the last few months, out of whack with the general narrative of a slowdown in the economy. But the PMI for March came in at 52.6, a six-month low, indicating the manufacturing sector is losing momentum. That strengthens the RBI’s hand for a rate cut, all the more so given that the PMI sub-index for output prices has remained tepid. With a slowing manufacturing sector and the lack of inflationary pressures, why shouldn’t the RBI cut rates?

But here’s the rub: the slowdown may be temporary, the result of the impending elections. The survey says, ‘Close to 16% of companies reported greater sales, citing successful marketing efforts, strong underlying demand and the receipt of orders in bulk. At the same time, 8 percent of firms noted lower levels of new work, which they associated with an increasingly competitive environment and the upcoming elections.’ Note that bit about strong demand.

Also, while the manufacturing PMI is at a six-month low, the Future Expectations sub-index, a gauge of how those surveyed believe the manufacturing sector will perform in the future, is at a seven-month high. Why the contradiction? The survey says, ‘Sentiment among Indian manufacturers regarding the year-ahead outlook for output remained positive, with optimism strengthening to a seven-month high. Production growth is projected to stem from marketing initiatives, capacity expansion plans and favourable public policies after the elections.’

That optimism should limit the rate cut to 25 basis points, as much will depend on the new government’s policies.



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