The most attention-grabbing aspect of the March PMI release was the surge in input prices to a new series high of 67.4, suggesting that companies are facing sizeable and mounting cost pressures. The survey also indicates that manufacturers are becoming more willing to pass on some of these increases in the form of higher output prices (54.6 from 52.1).
While the results were no doubt impacted by the one-off duty hikes announced in the budget, the RBI can’t afford to ignore the situation, particularly as more respondents are pointing to supply-side capacity pressures. In our view, the biggest danger to Indian economic growth in coming months will be an inability to meet demand due to a lack of capacity rather than a significant softening in demand itself.
On the activity side, the overall manufacturing PMI dropped modestly to 57.8 from 58.5 but remains consistent with ongoing double-digit year-on-year gains in industrial production, albeit not at quite the pace seen in recent monthsboth.
Talking of exports, the February merchandise numbers were reportedly up nearly 35% year-on-year. This compares with an 11.5% rise in January and is the strongest since August 2008.
For the sake of the currency, it is perhaps just as well that portfolio funds continue to flood in. In the first nine months of the
2009/10 fiscal year, portfolio flows were worth a net USD20.5bn, compared with a deficit of USD12.4bn in April to December
2008.