The RBI is likely to retain its hawkish stance on Tuesday, but may pause for more clarity on inflation risks.
HSBC's manufacturing PMI improved last month, led by higher order flows from both domestic and external sources. However, output was unchanged due to power shortages. Inflation was a mixed bag, with input prices easing and output prices rising. The outlook for inflation is complicated by risks from El Nino and possible pro-growth policies from the new government. The RBI is likely to retain its hawkish stance on Tuesday, but may pause for more clarity on inflation risks. |
Facts |
Implications |
Manufacturing momentum may be more or less stable, but it is stuck at a relatively depressed level. Incrementally, demand may be strengthening from both external and domestic sources. However, capacity constraints in the economy including from energy shortages are hampering growth. |
With last month's election result, momentum should tick up in the coming months as previously pent-up consumer and investment spending starts flowing again. Still, risks linger, including potentially poor rainfall in the coming months. |
The PMI readings on prices send conflicting messages (input prices down, output prices up). Overall, retail level inflation is far too high for comfort and the outlook remains challenging. Potentially weak rainfall due to El Nino could push up food inflation. Moreover, if the government decides to loosen its purse strings and follow a pro-growth strategy, it could fan inflation further. The RBI, therefore, is likely to remain on hold in June, waiting for more clarity. |
Bottom line |
The momentum in the manufacturing sector improved at the margin, thanks to higher domestic and export orders. However, output growth held steady as frequent power cuts forced firms to accumulate backlogs at a faster pace. Encouragingly, input price pressures eased further, but with output prices still rising the RBI will remain vigilant. |
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