India's manufacturing growth slows down on demonetisation move

New Delhi: Hit hard by demonetisation move, manufacturing growth decelerated sharply in November as cash crunch slowed down domestic consumption, production of goods and new orders, even as subdued inflationary pressure raised hopes for a rate cut by RBI, a monthly survey showed Thursday.

The Nikkei Markit India Manufacturing Purchasing Managers' Index (PMI) -- a gauge of manufacturing performance -- fell to 52.3, down from a 22-month high of 54.4 in October.

A reading above 50 indicates expansion, while a score below this level means contraction in factory output.

"PMI data for November showed that the sudden withdrawal of high-value banknotes in India caused problems for manufacturers, as cash shortages hampered growth of new work, buying activity and production," said Pollyanna De Lima, Economist at IHS Markit and author of the report.

November data still marked the 11th consecutive monthly improvement in manufacturing conditions across India.

"... Whereas some may have anticipated an outright downturn, the sector held its ground and remained in expansion mode," Lima said.

While many companies, surveyed for the monthly PMI scorecard, commented that further disruption is expected in the near-term, the demonetisation of the rupee is anticipated to ignite growth in the long-run as unregulated companies will leave the market, Lima added.

Softer expansion in new business inflows affected the manufacturing sector growth during November as order books rose at a moderate pace which was the slowest since July.

The surveyed companies reported higher demand from domestic as well as external clients, but indicated that growth was hampered by the money crisis, the survey said. The money issue was the main reason listed by respondents for softer growth in input buying, it added.

On the prices front, the report there was an overall increase in input costs, but the rate of inflation eased since October.

"Of respite to firms, cost inflationary pressures softened, which in turn encouraged the vast majority of businesses to keep their selling prices unchanged. If this trend is sustained, we will likely see further cuts to the benchmark rate," Lima said.

The Monetary Policy Committee, headed by RBI Governor Urjit Patel, in October cut benchmark interest rates by 0.25 percent to 6.25 percent. The next RBI policy review is on December 7.