Manufacturing activity growth slows in Feb to 54.5 on weak demand: PMI

India's factory activity growth slowed in February from the previous month's eight-year high due to a modest weakening in demand and output, although overall conditions remained firm, a private survey showed on Monday.

The Nikkei Manufacturing Purchasing Managers' Index, compiled by IHS Markit, fell to 54.5 last month from January's 55.3, above a Reuters poll forecast of 52.8.

It has stayed above the 50-point threshold mark, which separates growth from contraction, for over two years.

"Factories in India continued to benefit from strong order flows in February, from both the domestic and international markets," Pollyanna De Lima, principal economist at IHS Markit, wrote in a release.

"The pick-up in demand meant that companies were able to further lift production and input buying at historically-elevated rates."

While the latest survey showed the new orders sub-index, a proxy for domestic demand, slipped to 57.5 in February, it remained above the long-term average since the index was introduced in March 2005.

That encouraged firms to maintain solid output.

However, foreign demand and optimism were weaker in February than in January on rising concerns the spread of coronavirus outside China would affect major Asian economies significantly.

That subdued mood pushed hiring activity to its lowest in three months.

"Alarm bells are ringing for Indian goods producers as the COVID-19 outbreak poses threats to exports and supply chains.

Businesses became less confident about the year-ahead outlook for output, in turn restricting hiring activity," de Lima said.

On the price front, both input cost and output charge growth slowed last month, suggesting retail inflation may cool.

That would give policymakers some headroom to address key issues after the recent high inflation-low growth conundrum.

"Price data continued to highlight a lack of inflationary pressure in the sector. Only modest increases in input costs and output charges were recorded in February, a trend that has been a key theme of the manufacturing PMI survey for over a year," added de Lima.

Manufacturing PMI signals revival, hits 8-year high of 55.3 in January

The country's manufacturing sector activity climbed to a near eight-year high in January, driven by sharp rise in new business orders amid a rebound in demand conditions that led to rise in production and hiring activity, a monthly survey said on Monday.

Following a sharp improvement in demand, January saw growth of new business, output, exports, input buying and employment. At the same time, business sentiment strengthened and there were softer rises in both input costs and output charges.

The IHS Markit India Manufacturing PMI rose from 52.7 in December to 55.3 in January, its highest level in just under eight years.

"Manufacturing sector growth in India continued to strengthen in January, with operating conditions improving at a pace not seen in close to eight years," said Pollyanna de Lima, Principal Economist at IHS Markit.

This is the 30th consecutive month that the manufacturing PMI has remained above the 50-point mark. In PMI parlance, a print above 50 means expansion, while a score below that denotes contraction.

Companies noted the strongest upturn in new business intakes for over five years, which they attributed to better underlying demand and greater client requirements.

The rise in total sales was supported by strengthening demand from external markets, as noted by the fastest increase in new export orders since November 2018.

On the employment front, hiring activity improved in January, with firms increasing employment at the quickest rate in close to seven-and-a-half years. New business growth and projects in the pipeline were cited as the main reasons for job creation.

Meanwhile, Indian manufacturers were more upbeat about the year-ahead outlook for production. Optimism stemmed from forecasts of better demand, new client wins, marketing efforts, capacity expansion and new product releases.

"To complete the good news, there was also an uptick in business confidence as survey participants expect buoyant demand, new client wins, advertising and product diversification to boost output in the year ahead," Lima said.

On the price front, there were slower increases in both input costs and output charges, the survey noted.

"Companies also benefited from subdued cost pressures, which enabled them to restrict increases in their fees to some extent," Lima said.

The Reserve Bank of India is scheduled to hold its Monetary Policy Committee (MPC) during February 4-6, 2020.