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India’s manufacturing sector witnessed a modest growth in May, but going ahead “weak demand conditions” may persist that could have a negative impact on the industrial output numbers, says an SBI research report.
The SBI Monthly Composite Index , a leading indicator for manufacturing activity in Indian economy, inched up from 46.8 in April 2015 to 53.8 in May 2015. However, the outlook is bearish.
“We believe that due to continued tepid credit growth and subdued commercial vehicle sales in recent period, a negative impact may precipitate in June/July 2015 IIP,” SBI said, adding that “this will subsequently reflect in our Composite Index values, going forward.”
Meanwhile, the yearly SBI Composite Index for May 2015 decelerated to 56.4 in May from 58.2 in April 2015, due to entrenched disinflationary impetus and weak demand.
An index value of less than 42 means large decline, while value of 42 to 46 means (moderate decline), 46 to 50 (low decline), 50 to 52 (low growth), 52 to 55 (moderate growth) and above 55 high growth, SBI said.
Weak demand
“We are overtly concerned regarding the weak demand conditions that are refusing to pick up. Inflation numbers will continue to surprise on the downside, with retail inflation likely to be at sub 4 per cent within the next 2—3 months, and this will not be a result of only base effect, as widely believed,” the report said.
SBI further added that “overall, with economic growth currently patchy and plagued with weak demand and low capex, corporate earnings are likely to remain subdued for most sectors barring few exceptions.”
According to SBI, infra activities will start possibly from the second half of this year as the Government would be in a position to push the projects.
Time to cut rates, again
“With the Government doing its bit, it is imperative to improve sentiments further through another round of monetary easing,” the report said.
The central bank has lowered its policy rate twice so far in 2015, but maintained a status quo in its last monetary policy review on April 7 on fears of unseasonal rains impacting food prices.
The next review meeting is scheduled on June 2, although the previous two cuts have taken place outside the scheduled policy reviews.
The SBI Composite Index rivals the existing data point from British lender HSBC. It has been developed on the basis of the bank’s internal loan portfolio, which mirrors the credit demand in the country, and other data sets available in public domain.
Inflation surprise SBI said inflation numbers will continue to surprise, with retail inflation likely to be at sub-4 per cent within the next two-three months, and this will not be a result only of the base effect. “This (the inflation number) is already undershooting RBI projections (5.5 per cent by March 2016) by 40-50 basis points. Wholesale prices will remain in deep negative territory for most of 2015, if not the entire duration,” it said.
Retail inflation as measured by the Consumer Price Index (CPI) cooled further in April to 4.87 per cent from the revised level of 5.25 per cent in the previous month, according to ministry data.
With the government doing its bit (in terms of plans to come out with several project initiatives), SBI observed that it is imperative to improve sentiment further through another round of monetary easing.
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