India's manufacturing growth scales 3-month high, headwinds remain

New Delhi: Manufacturing in India registered a significant uptrend and hit a three-month high in June, backed by a stronger increase in new business orders, while subdued inflationary pressure may prompt RBI to reduce key policy rate, a monthly survey said.

The Nikkei Markit India Manufacturing Purchasing Managers' Index (PMI) - a composite indicator of manufacturing performance - rose to 51.7 in June from 50.7 in May amid a sharper rise in new orders.

A reading above 50 denotes expansion while one below means contraction.

"Indian factories registered a welcome upturn in growth of both production and new orders mid-way through 2016, but producers clearly remain stuck in a low gear," Pollyanna De Lima, Economist at Markit and author of the report, said.

"The domestic market continues to be the main growth driver, as the Indian economic upturn provides a steady stream of new business... New foreign orders rose in June following a decline in May. However, it looks as if lacklustre global demand remains a headwind for Indian manufacturers."

Lima added that "rates of expansion remain weak by historical standards, with the PMI average for April-June being lower than that seen in the prior quarter".

On the jobs front, however, sustained growth of output and orderbooks failed to push producers to hire more.

"In fact, it has been roughly three years since the sector has seen any meaningful job creation," Lima said.

On prices, the report said purchasing cost inflation softened while selling prices remained broadly unchanged.

"This lack of inflationary pressure provides RBI with further leeway to boost economic growth through cutting its benchmark rate," Lima said.

In its policy review meet in June, RBI Governor Raghuram Rajan kept interest rates intact, citing rising inflationary pressure, but hinted at a reduction later this year if good monsoon helps ease inflation.

The industry is still hopeful of further rate reduction from the apex bank to boost investment.

The Indian economy grew at 7.9 percent in the fourth quarter of 2015-16, taking the overall GDP growth to a five-year high of 7.6 percent in the fiscal.