By Daniel Hunter

Operating conditions across the Indian manufacturing sector deteriorated for the second consecutive month in September. However, both output and new orders contracted at slower rates. Still, faced with fewer projects, companies reduced their workforce numbers for the first time since February 2012.

Up from 48.5 in August to 49.6 in September, the seasonally adjusted HSBC India Manufacturing Purchasing Managers’ Index (PMI) indicated a marginal and slower deterioration of business conditions in India. However, the PMI quarterly average for Q3 was the lowest since Q1 2009.

September data pointed to a further contraction of manufacturing production in India, with panellists commenting on lower levels of incoming new work and economic instability. The overall rate of contraction was, however, marginal and eased since August.

Although new orders fell at a slower and marginal pace, the contraction of export business accelerated to the quickest in over two years. Anecdotal evidence suggested that a depreciation of the rupee versus the US dollar had resulted in higher prices paid for inputs and limited firms’ ability to price competitively.

Subsequently, Indian manufacturers reduced their buying activity for the second month running in September. However, quantity of purchases fell only slightly and at a slower rate than that seen one month previously.

Sector data highlighted capital goods as the best performing sub-sector in September, with production, new orders and purchasing activity all expanding. Conversely, both consumer and intermediate goods producers posted falls in all of these variables.

Reflective of a further reduction in new order levels, Indian manufacturers cut their staffing levels in September. Despite being marginal, the latest fall ended a period of job creation that had lasted for one- and-a-half years.

Amid reports of a weaker currency, manufacturing firms reported higher prices paid for imported raw materials. Overall input costs rose sharply, with all three sectors covered by the survey signalling stronger rates of cost inflation in the latest month. Furthermore, the index measuring purchasing costs climbed to its highest mark in 15 months. Consequently, prices charged were raised further. The rate of charge inflation was, however, only slight and the slowest in three months.

A divergence was seen with regards to inventory levels in September. Pre-production inventories fell in line with lower purchasing activity, while holdings of finished goods were accumulated at a slight pace. Intermediate and capital goods producers recorded higher post- production inventories, while little change was signalled at consumer goods firms.

"Manufacturing activity continued to shrink in September, albeit at a slower pace. Order flows remain weak, especially export orders, and employment fell," Leif Eskesen, Chief Economist for India & ASEAN at HSBC said.

"Moreover, businesses cut back quantity and stocks of purchases. While output prices rose at a slower pace, input prices rose markedly, as the effects of the weaker exchange rate continue to pass through. Despite the weak growth readings, the build-up in underlying inflation pressures suggests that the RBI has to keep its inflation guards up.”

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