Factory Activity Improved In September As Demand Strengthened

The country's factory activity improved last month as a recovery in the economy from the pandemic-induced slump boosted demand and output, according to a private survey, but firms reduced headcount at the sharpest pace since May.

That recovery might continue for at least a few months, supported by ultra-easy monetary policy and continued fiscal spending.

A hike in the Reserve Bank of India's key interest rate looks to be a rare possibility until at least next fiscal year and government said earlier this week it would continue with its borrowing-backed spending to revive the economy.

The Manufacturing Purchasing Managers' Index, compiled by IHS Markit, rose to 53.7 in September from 52.3 in August, staying above the 50-level separating growth from contraction for the third straight month.

"Indian manufacturers lifted production to a greater extent in September as they geared up for improvements in demand and the replenishment of stocks," noted Pollyanna De Lima, economics associate director at IHS Markit.

"There was a substantial pick-up in intakes of new work, with some contribution from international markets."

Improvements in both domestic and overseas demand saw new orders expand at a quicker pace in September and factories raised output at a significantly faster rate compared to August.

However, that failed to encourage factories to hire more workers - a much needed step to boost weak labour market conditions - and instead they reduced their workforce at the sharpest pace in four months.

"Companies continued to purchase extra inputs in September, but jobs were little changed over the month. In some instances, survey participants indicated that government guidelines surrounding shift work prevented hiring," added De Lima.

Meanwhile, after moderating in the first two months of last quarter input cost inflation hit a five-month high, partly driven by rising fuel prices, transportation costs and supply-chain disruptions.

But output prices increased at a weaker pace, indicating firms were only able to partially pass on the extra costs to customers.

Still, optimism about the year ahead improved slightly last month as a continued easing of pandemic mobility restrictions raised hopes for a further improvement in demand.