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Manufacturing Picks Up In April After 3 Months Of Decline

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After three months of decline, India's manufacturing sector grew slightly in April as new orders poured in, but the rate of expansion was limited by power shortages and was weakest so far this year, a business survey showed on Wednesday.

The HSBC India Manufacturing Purchasing Managers' Index (PMI), compiled by Markit, rose to 54.9 in April from 54.7 in March.

The index has remained above the 50-mark that divides growth from contraction for more than three years.

The rise in HSBC's PMI index (to 54.9 in April from 54.7 in March) is welcome news for the rupee's prospects, economists say. The PMI signals India's manufacturing sector has bottomed out and may also reduce the need for further RBI rate cuts, economists add.

However, the rupee will need more than a PMI report to recover, given the host of economic and fiscal challenges facing India, they also say.

"The release reduces the need for further monetary easing and is positive for the INR as well as for levels of INR OIS, although we continue to see the currency as vulnerable to external and fiscal imbalances," Dariusz Kowalczyk, an economist with Credit Agricole CIB in Hong Kong, told Reuters.

"Activity in the manufacturing sector expanded at a slightly faster pace in April. While output growth moderated ... new orders continued to pour in, including for exports," said Leif Eskesen, chief economist for India & ASEAN at HSBC.

The new orders sub-index rose to 61.1 in April after falling to 58.1 in March, buoyed by strong exports, but while remaining solidly above 50 the factory output index fell for the third straight month.

However, actual industrial output data is painting a bleaker picture with growth in eight core industries' growth rate slowing down to 2 per cent in March as against 6.5 per cent in the same month last year on account of dismal expansion in crude oil and natural gas sectors.

IIP grew 4.1 per cent in February from a year ago, way below the 6.6 per cent expected by analysts.

This does not bode well for Asia's third largest economy as factory output accounts for roughly 15 per cent of gross domestic product (GDP).

Capacity remained tight for the manufacturing sector in India during April as backlogs of work increased and inflationary pressures strengthened owing to rise in both output and input prices, HSBC said.

"Inflation accelerated with both output and input prices rising faster," said Eskesen. "This suggests that upside risks to inflation remain and that the RBI's rate cut could turn out to have been premature and too aggressive."

In its annual monetary policy statement for 2012-13, RBI, after a gap of three years, had cut interest rate by 0.50 per cent making credit cheaper.

RBI had hiked policy rates 13 times between March 2010 and October 2011 to control persistently high inflation.

Fears of adding to inflationary pressures that have plagued the economy might prevent the central bank from cutting interest rates aggressively to stimulate growth.

Meanwhile, there was a modest increase in employment in the manufacturing sector in April.

"The latest increase in staffing levels was only modest.

Where job creation was recorded, this was mainly linked to higher workloads," HSBC said.

Last month economists cut their GDP forecasts for the fifth straight quarterly Reuters poll and now expect growth to average 7.1 per cent in the fiscal year to March 2013.

The government is more optimistic, expecting the economy to grow 7.6 per cent in the same period, but even that is still a far cry from the near double-digit rates seen before the onset of the global financial crisis in 2008.

The economy has been throttled in recent years by a combination of high inflation, tight monetary policy, weak global economic conditions and the lax implementation of fiscal policies and reforms.

The PMI survey showed the costs of raw materials grew at their fastest pace since August, and firms hiked their prices at the quickest rate in a year.

Euro Zone Declining
Earlier, data out from Asia had also raised hopes that the global economy was recovering and the worst had probably passed for China. The Euro Zone data, however, showed that the downturn in the manufacturing sector had deepened in April, undermining hopes for a global recovery inspired by a strong rise in US factory activity.