The Nikkei India Manufacturing PMI's headline index increased from 49.6 in December to 50.4 in January. This was the first increase in the index since October with the index dropping sharply in both November and December following the Indian government's decision in early November to withdraw high-denomination currency notes as legal tender.
The increase in the headline index reflected modest expansion in both output and new orders, after both contracted in December. Survey respondents noted conditions were returning to normal as the impact of cash shortages caused by the government's decision began to ease, and their confidence about output over the next twelve months has also picked up. The survey indicates, however, that new export orders fell in January, while employment levels were reported to be unchanged.
Price pressures appear to have strengthened in January, with the survey showing input costs rising at the fastest pace in 29 months, while selling prices were increased, albeit marginally, for the eleventh consecutive month.
Although this is only one data point, the rebound in manufacturing conditions shown in today's survey provides some evidence that the impact of cash shortages caused by the government's decision may be starting to fade. At their last policy review, officials at the Reserve Bank of India left policy settings unchanged, partly reflecting a view that this impact may be short-lived. The next policy meeting is scheduled for next week.
The Manufacturing Purchasing Managers' Index (PMI) is a joint publication by Markit and the Nikkei media organisation and provides an estimate of manufacturing business activity for the preceding month. The report uses information obtained from a representative sector survey incorporating around 400 companies in eight broad categories. Results are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting).
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic survey data such as the Markit PMIs, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.
The Markit PMI manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. And its sub-indexes provide a picture of orders, output, employment and prices.
The HSBC India Manufacturing PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 500 manufacturing companies. The panel is stratified geographically and by Standard Industrial Classification (SIC) group, based on industry contribution to Indian GDP. Survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month. For each of the indicators the 'Report' shows the percentage reporting each response, the net difference between the number of higher/better responses and lower/worse responses, and the 'diffusion' index. This index is the sum of the positive responses plus a half of those responding 'the same'.