Why pervasive inflation and receding manufacturing stunt India

Market Realist

India continues toying with investors' feelings (Part 2 of 3)

(Continued from Part 1)

Increasing inflation prevents easing

The wholesale price index jumped in July. Lost onion crops raised food prices, though the upcoming monsoon will ease the food inflation. At the same time, though, regulated prices will continue to push prices higher while imports continue to get more expensive as the rupee depreciation reaches new lows.

The inflation problem hinders any easing efforts by the government. Unless inflation establishes a clear downtrend, any stimulus in the form of lower rates or increasing money supply will only cause inflation to move back up and continue hurting the currency and its purchasing power.

On the other hand, easier credit is required to fund much-needed infrastructure projects to stop the stubborn logistical drawbacks and power cuts that keep hampering growth.

Manufacturing disappoints

Industrial production fell in July, which was more than expected after the July PMI (purchasing managers’ index) dropped below 50.1 in July. At this level, the PMI implied that the manufacturing output was stuck in neutral gear.

Brazil (EWZ), Russia (RSX), and Mexico (EWW) saw their PMIs drop below 50 in July. China (FXI) as well had remained below 50 in July. However, this month’s PMI showed India now fell below 50, just as China and Mexico pulled above 50, and Russia and Brazil moved up closer to 50.

It seems that India’s supply-led limitations are preventing it from recovering in line with the rest of the world.

Continue to Part 3

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