Manufacturing PMI suggests economy is stablising By SONAL VARMA, ECONOMIST, NOMURA INDIA India’s manufacturing PMI was unchanged at 52.8 in September from August. Both external and domestic demand are improving: the output sub-index improved this month (to 53.2 from 52.7), new orders rose marginally (54.4 from 54.3), while the export new orders index rose spiked to a four-month high (53.8 from 49.2), rising above the 50 level for the first time since June. Given rising orders, there is an intended inventory accumulation, both raw material and finished goods inventory rose much more than the rise in new orders, leading to a fall in the new orders-to-inventory ratio to 1.03 from 1.06 in August, suggesting a risk if the expected demand pickup does not materialize. Manufacturing PMI has been consolidating at the 52.8/52.9 level for three months now. This is in line with our proprietary composite leading index for India, which suggests that the economy is bottoming out and should begin to improve. However, we do not expect a V-shaped recovery like 2009 due to weak global demand. On the price front, the input price sub-index rose to a four-month high (62.3 from 60.7) reflecting higher global commodity prices and the recent diesel price hike. Encouragingly, the output price index moderated to a six-month low this month (56.8 from 59.1). As a result, the ratio of the output price index to the input price index fell to 0.91 in September from 0.97 in August, which suggests there has been some deterioration in margins this month. Demand has improved this month, with a sharper rise in external demand. We believe that GDP growth is bottoming out and we should see a marginal rise in the coming quarters. Output prices have eased in September, but with input cost pressures again on the rise and demand stabilizing, the risk of a pass-through remains.