India's manufacturing sector expanded in February at the strongest pace in 12 months, driven largely by growth in new business orders and an improved macroeconomic situation, HSBC's latest Purchasing Managers' Index (PMI) showed.
The HSBC India Manufacturing PMI, a measure of factory production, stood at 52.5 in February, up from 51.4 in January, signalling a solid and stronger improvement in business conditions across the manufacturing sector.
A PMI below 50 signals negative growth or contraction; but India has never dropped to this level even at the height of the economic downturn.
Activity in the sector expanded for the fourth consecutive month in February. ''New order flows have firmed, with the improvement in external demand and the reduction in macroeconomic uncertainty since last summer," HSBC chief economist for India & ASEAN Leif Eskesen said.
The survey's results should provide some relief after data on Friday showed that India's economy grew by a slower-than-expected 4.7 per cent annually in the three months through December, dragged down by a contraction in manufacturing and mining.
Production growth accelerated on a stronger rise in incoming new work. The pace of output expansion was solid and the quickest in one year. Higher demand from both domestic and export clients boosted order flows in February, the PMI showed.
Eskesen, however, noted that the recovery in manufacturing is still likely to prove "protracted" given the lingering structural constraints. The PMI only covers industrial output and does not factor in the performance of utilities like power.
On inflation, the report said input costs rose during February and subsequently, average tariffs were raised further last month. The annual rate of inflation, based on the monthly wholesale price index, eased to a seven-month low of 5.05 per cent in January.
"Underlying inflation pressures remain potent, which was evident from the jump in the input price component of the PMI survey. This will keep RBI hawkish and likely compel it to raise rates a bit further this year," Eskesen said.
The HSBC survey showed a sharp rise in input prices in February, although companies were slower to pass these rises on to consumers than last month.
Costlier raw material prices for manufacturers could lead to higher consumer price inflation, which was running at 8.79 per cent annually in January.
The Reserve Bank of India raised key policy rates by 0.25 per cent to 8 per cent in the third quarter review of monetary policy in a bid to curb inflation.
The RBI has hiked the repo rate thrice since September, cementing its inflation fighting credentials, although it indicated at its January policy-setting meeting that rates would likely be kept on hold if inflation showed signs of subsiding.
"Underlying inflation pressures remain potent, which was evident from the jump in the input price component of the PMI survey. This will keep RBI hawkish and likely compel it to raise rates a bit further this year," said Eskesen.