India's Manufacturing PMI Contracts For First TIme In Over 4 Years, As New Orders, Output Fall At Faster Rates

India’s manufacturing sector output contracted in August for the first time since March 2009, as new orders and output plunged at a faster pace, adding to the woes of the country's service-oriented economy, which grew at its slowest rate in four years in the last quarter, even as a battered Indian rupee is struggling to hold its ground against the dollar.

The HSBC India Manufacturing PMI -- a composite indicator that gauges factory output and operating conditions in the manufacturing sector -- that was released on Monday, showed that the country posted a reading of 48.5 in August, down from 50.1 in July. A reading of 50 divides growth from contraction. Economists polled by Reuters had expected a reading of 49.9.

“Manufacturing activity contracted... led by a decline in new orders, especially export orders. Together with a draw-down in finished goods inventories, this led to a drop in output,” Leif Eskesen, chief economist at HSBC, said in a statement.

Manufacturing conditions in the country deteriorated as new orders plummeted at the fastest rate since February 2009, dragging the index down to contraction territory. The survey showed that export orders also fell, breaking an 11-month sequence of growth, in August. Domestic demand also dropped during the month highlighting the fragile economic conditions prevailing in Asia’s third-largest economy.

Manufacturing output dropped for the fourth consecutive month in August and at the fastest rate in four-and-a-half years, with intermediate goods companies recording the sharpest decline. And, a weak rupee, which depreciated by almost 8 percent against the dollar in August, took a toll on raw-material imports.

“Encouragingly, input and output price inflation slowed despite the weakening of the currency, which likely reflect the softening demand conditions and, therefore, declining pricing power,” Eskesen said.

The disappointing survey results closely follow another set of bleak data released by the government on Friday, which showed that India’s gross domestic product for the second quarter grew at 4.4 percent.

Over the past several weeks, the Indian economy has been battered by a sharp fall in the domestic currency, amid capital outflows sparked by the U.S. Federal Reserve's discussions about winding down its easy monetary policy. Long-term issues such as a gaping current account deficit, political inertia and a lack of progress in the implementation of economic reforms have worsened economic conditions, leading to stagnation in the manufacturing sector.

And, the rupee's near-constant depreciation has led the central bank to tighten liquidity, which has further affected growth adversely.

“Notwithstanding the weak growth backdrop, the RBI will likely keep its liquidity tightening measures in place for a while still to help contain the depreciation of the currency. Combined with the heightened macroeconomic uncertainty, this will continue to weigh on growth in coming months,” Eskesen noted.