January 2, 2012

India PMI Rises Fastest in 6 Months

Inflation rising, but there's no room to cut interest rates

Economic life in India is on the rise, but so, too, is inflation. Economic life in India is on the rise, but so, too, is inflation.

As much of the rest of the world seems to be slowing down, India is moving in the opposite direction, with its Purchasing Managers’ Index rising at the fastest rate in six months. Inflation is rising as well, which leaves little room for maneuvering on the country’s tight monetary policy.

Bloomberg reported that domestic demand has fueled the country’s economy even as world demand backs off. In a statement, HSBC Holdings and Markit Economics said that the PMI in December rose to 54.2 from 51 in November, adding that growth will be constrained by higher borrowing costs and global economic weakness. Expansion is indicated when the number rises above 50.

In the statement, Leif Eskesen, a Singapore-based economist at HSBC, said, “Manufacturing activity rebounded on the back of increases in output and new orders. However, inflationary pressures remain firm leaving no room for the RBI to ease its tight monetary policy stance in the near term.”

December inflation figures for India were “not encouraging,” according to the statement from HSBC and Markit Economics, with input price increases staying “well above historical levels” and the index of output prices rising to 56.2 from 55.4 in November.

According to a BBC interview, Duvvuri Subbarao, governor of the Royal Bank of India, said the bank would probably shift its focus toward boosting growth. Inflation and price increases on food and other essentials, such as fuel, have led the bank to boost its key interest rate 13 times since March 2010. Tightening has had some effect on inflation, and Subbarao said, "From here on we could expect reversal of monetary tightening," adding that it was "difficult to say when that will take place and in what shape it will roll out."

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