Sep PMIs ease but stay in expansionary terrain : DBS Research Report

Private sector activity eased in Sept, with the Nikkei-Markit manufacturing PMI slowing to 51.2 (vs Aug's 52.3) and services at 51.3 (vs Aug's 51.8). This comes in the wake of global PMIs losing steam towards end-3Q, with emerging mar­kets as the main drag on headline global growth while developed economies fared better. India is, however, amongst the few where readings are above the 50-neutral mark, where as other economies (including China) face a contraction­ary manufacturing sector.

On three month average basis, India's manufacturing activity stabilised, while the services activity has turned up since mid-year. Downside risks to growth are modest as 3Q15 PMIs improved from 2Q and remain stable from the comparable period last year.

The breakdown reveals sluggish global activity hurting new export order growth, just as domestic orders eased towards late-3Q. Meanwhile, input prices for the manufacturing sector continue to retreat given weak pipeline pressures and falling commodity prices, while services' firms input costs softened after a ten-month hiatus. Output prices also moderated, but a slower pace, suggesting that manufacturers preserved margins amidst lower business volumes.

Overall, while Jul-Sep saw an upturn in the PMI surveys, global growth contin­ues to slow. The domestic sector is expected to pick part of the slack, as profit margins and output ratios stabilise. However, amidst stressed banks/ corporate balance sheets, fiscal consolidation and weak credit growth, the upturn in real consumption and investment spending will be more gradual than anticipated. We expect FY15/16 growth to average 7.4% from 7.3% the year before.

The Reserve Bank of India has drawn confidence from the easing inflation out­look and front-loaded 125bps cuts in first nine months of this year. A pause is likely to follow in December, with odds of further cuts in Mar16 quarter to rise if inflation undershoots the 5.8% official estimate and external risks abate.

Into FY16/17, the RBI's main challenge will be to keep inflation close to 5% as impact of pay commission trickles in, base effects from low commodity prices fade and growth makes a gradual comeback. Formation and composition of the monetary policy committee will also be under watch.

Source : Equity Bulls

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