The HSBC India Manufacturing Purchasing Managers' Index (PMI), a measure of factory production, stood at 52.5 in February, up from 51.4 in the previous month, signalling a solid and stronger improvement in business conditions across the country's manufacturing sector.
Activity in the sector expanded for the fourth consecutive month in February. A PMI reading above 50 indicates growth while a lower reading means contraction.
"Manufacturing activity picked up further 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.
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.
Eskesen, however, noted that the recovery in manufacturing is still likely to prove "protracted" given the lingering structural constraints.
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.
Reserve Bank of India (RBI) Governor Raghuram Rajan had raised the key policy rate by 0.25 per cent to 8 per cent in the third quarter review of monetary policy in a bid to curb inflation.
After Rajan took over as RBI Governor in September, the apex bank increased the key policy rate three times by 0.25 per cent each.
Indian manufacturers post fastest growth in a year in February: HSBC
(Reuters) Indian manufacturing activity and new orders showed their strongest growth in a year in February, according to a survey released on Monday that suggested that the worst is over for Indian factories struggling through an economic slowdown.
The survey's results should provide some relief after data on Friday showed Asia's third-largest economy grew by a slower-than-expected 4.7 percent annually in the three months through December, dragged lower by a contraction in manufacturing and mining.
The HSBC Manufacturing Purchasing Managers' Index (PMI), which gauges the business activity of India's factories but not its utilities, rose to 52.5 in February, its highest in a year, from 51.4 in January.
Overall new orders for factory goods, which rose to a one-year high of 54.9 contributed to the surge. Export orders climbed to their highest in eight months.
"Manufacturing activity picked up further in February. New order flows have firmed, with the improvement in external demand and the reduction in macroeconomic uncertainty since last summer," said Leif Eskesen, Chief Economist for India & ASEAN at HSBC.
Opinion polls show the opposition Bharatiya Janata Party is likely to win the largest block in parliament in a general election due by May, but it is uncertain how much support it will need from smaller regional parties to form a coalition.
While some potential coalition partners could be put off by Narendra Modi's brand of Hindu nationalism, the BJP's candidate for prime minister is regarded as business friendly and dynamic, and several leading industrialists have voiced their support. The HSBC survey showed a sharp rise in input prices in February although firms passed these rises on at a slower pace than last month. Costlier raw material prices for manufacturers could lead to higher consumer price inflation, which was running at 8.79 percent annually in January.
The Reserve Bank of India has unofficially started targeting consumer prices to frame its policy and any signs of rising costs will likely pressure the central bank to hike rates again.
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.
But the IMF expects the RBI to continue raising its policy interest rates and also expects India's consumer price index to remain near double digits well into next year driven by food prices
"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.