Manufacturers benefited from rising inflows of new business from domestic and export clients

January saw the Indian manufacturing sector climb back into expansion territory, as the industry recovered following the contraction seen at the end of last year. Alongside a resumption of output at some firms impacted by December's flooding, manufacturers also benefited from rising inflows of new business from domestic and export clients.

At 51.1 in January, up from 49.1 in December, the seasonally adjusted Nikkei India Manufacturing Purchasing Managers' IndexTM (PMI) TM - a composite single-figure indicator of manufacturing performance - moved back above the 50.0 mark. Although the rate of expansion was only moderate, it was the sharpest signalled for four months.

Levels of production and total new business also registered mild increases following contractions in the prior survey month. The consumer goods sub-sector remained the principal growth engine at the start of the year, seeing substantial expansions of both output and new orders. In contrast, producers of investment goods saw output and new orders fall, while production volumes stagnated in the intermediate goods category.

The trend in new export order inflows strengthened during January, amid reports from companies of improved sales demand. The level of incoming new export business has now risen in each of the past 28 months.

January saw further mild job creation in the Indian manufacturing sector, with headcounts added to across the consumer, intermediate and investment goods categories. Where an expansion of payroll numbers was reported, this was generally linked to rising production requirements.

The latest data suggested, however, that January's increase in employment was insufficient to reduce the pressure on manufacturers' capacity.

This was highlighted by a further accumulation of backlogs of work at factories, the third in as many months. Moreover, the rate of increase accelerated to its highest since March 2015.

Price pressures remained on the upside at the start of 2016, with input costs and output charges both rising during January. Companies indicated that higher demand for raw materials had led to a number of cost increases. However, the rate of input cost inflation eased slightly and stayed below the long-run survey average.

Factory gate prices rose for the fourth successive month in January, with the rate of increase ticking up to a 14-month high. Survey respondents reported that charges had been raised in order to pass on part of the increase in purchasing costs.

January saw a modest increase in stocks of purchases, mainly the result of a further rise in the level of input buying activity. In contrast, inventories of finished products fell again.

Commenting on the Indian Manufacturing PMI survey data, Pollyanna De Lima, Economist at Markit and author of the report, said: "The opening month of 2016 saw a rebound in new business - from both domestic and external clients - leading manufacturers in India to scale up output following a short-lived downturn recorded in December. Whereas the trends in the growth rates are relatively weak in comparison with the long-run series averages, January's PMI data paint a brighter picture of the Indian economy.

"Although the RBI is likely to continue its monetary policy loosening cycle in 2016, February's meeting will probably see the repo rate remain unchanged at 6.75% as the central bank will remain wary of inflationary pressures building in the country."

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