September factory output crawls, rate hike is the villain

The effect of hardening interest rates is showing up in more ways than one. The latest to feel the pain is India’s manufacturing that has nearly stalled in September.

The growth has taken a big knock and hit its softest point since March 2009. A slowdown in output and order flow after a string of interest rate hikes is seen to be the main culprit.

The HSBC Markit India Manufacturing PMI fell more than two points to 50.4 from 52.6, very close to the 50 mark which divides growth and contraction.

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The output index plunged by its biggest amount in one month since November 2008, to 51.1 from 56.0. The data suggest that September was the worst month for India’s factories since March 2009 - when it shrank, just as world stock markets carved their lowest point since the financial crisis began.

With developed economies perilously close to a second recession, emerging markets, which have provided the motor for global growth in recent years, are also facing the crunch. “Growth momentum in India’s manufacturing sector eased further in September. This was driven by weaker orders, with export orders still contracting due to the weaker global economic conditions,” said Leif Eskesen, economist at HSBC.

India’s factory sector has gone from robust growth to near stall speed in just five months and the survey also suggested more weakness lies ahead.

The new orders index, a reliable gauge of future output, fell for the sixth straight month, while export orders contracted for a third month thanks to weak global demand.

Inflation pressures were slightly less intense than in August, the survey showed, but still remain.

“While the persistent inflation pressures support RBI’s tightening bias, the slowdown in manufacturing growth suggests that the end to the tightening cycle is at least now in sight,” said Eskesen.

The Reserve Bank of India (RBI) is faced with near double-digit inflation which it has tried to control through a dozen interest rate hikes over the past 18 months.

Indian inflation climbed to 9.78 percent in August from a year ago, and has hovered over 9 percent for many months now. Economists in a Reuters poll expect the RBI to raise its key interest rate one more time in 2011 to 8.50 percent by the end of the year. A similar PMI survey released on Friday showed manufacturing in Asian emerging peer China contracting for a third month.

The Japan Manufacturing PMI on Friday showed contraction there for the first time in five months, more evidence that the bounce following the devastating earthquake in March is fading.

(With inputs from Reuters)