New Delhi: India's manufacturing sector marginally grew in April on account of rising demand for new business orders, but moderation in output growth and sustained price pressures indicate that upside risks to inflation remain and that the Reserve Bank of India's recent higher-than-expected 50 basis points key policy rate cut may prove to be premature, a survey of Indian manufacturing companies' purchasing managers by HSBC and Markit Economics said.
The HSBC India Manufacturing Purchasing Managers' Index (PMI) was at 54.9 in April against 54.7 in March, HSBC said in a statement Wednesday.
A reading above 50 on the index shows expansion, while a reading below it indicates contraction.
"Activity in the manufacturing sector expanded at a slightly faster pace in April. While output growth moderated, partly on the back of power outages, new orders continued to pour in, including for exports," Leif Eskesen, chief economist for India and ASEAN at HSBC, said in the statement.
Further, employment in the manufacturing sector rose for the fourth time in a row in the last five months on account of increase in higher output requirements, the report pointed.
However, rate of cost inflation for Indian manufacturers surged for the second month in April, at a sharpest pace since August 2011. Higher raw material cost was the main cause for inflation yet again, it said.
"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," Eskesen said.
Earlier April, the RBI reduced the repo rate -- short term lending rate -- by a greater-than-expected 50 basis points, for the first time in three years, to boost the flagging economy, but warned that it had limited room to further cut the rate as inflation was likely to remain elevated.
India's wholesale price index (WPI) rose 6.89% on-year in March marginally slower than the 6.95% yearly rise recorded in February due to fall in fuel and power and manufactured goods prices. However, inflation is still higher than the RBI's comfort level of 5%-6%.
Earlier, the RBI had raised repo rate by 375 basis points in 13 sequential steps between March 2010 and October 2011 to tame stubbornly high inflation until it pressed the pause button on rate hikes in its December 16 mid-quarterly monetary policy review to address concerns about deteriorating economic growth.
The HSBC India Manufacturing PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in more than 500 manufacturing companies.