PMI MAKES THE MARKET HAPPY

The markets did very well today and some credit for this goes to the much better-than-expected Services PMI coming in for Oct.

The PMI improved from 41.8 in August to 49.8 in September – over 50 is considered to be out-of-the-woods so it is yet to quite make it there. This was the highest reading since Feb, which we now refer to as ‘pre-covid’ time. This reading of just a tad lower than 50 signals quite a stable output across the sector and this can be attributed to the re-opening of the business units.

New orders coming in remains low but the silver lining here – the drop was at the slowest pace in six months. Probably what really brought in a lot of cheer was the fact that, looking ahead, the sentiments remained optimistic – the first time since April in which service providers were confident about growth prospects.

Combine this with the Composite PMI Output Index, which came in at 54.6 v/s 46 in August plus the fact that Manufacturing PMI jumped to the highest in more than 8-years in September.

PMI is a reflection of the sentiment. Like the IIP, it reflects the economic health of the manufacturing and services sector.  It has five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. As the name indicates, it reflects the purchasing power of the managers, which in turn gives a peek into the demand. So, a rise in PMI means demand is up for goods and services. This index is calculated purely on survey, with seasonal adjusted variables but does not include the unorganized sector; a huge negative against PMI as India continues to be largely dominated by the unroganised sector.

On the other hand, IIP measures the growth of output from various sectors. The weightage of IIP data is broadly divided into three segments – manufacturing (75.53%), mining & quarrying (14.15%) and electricity (10.32%). And it also takes into account micro, small and medium enterprises. 

So, two questions – is the economy recovering and will RBI look at the PMI too?

Well, on the economic recovery front, most certainly, we are better than April and MoM it will get better. But it will be too naïve and premature to say that we have bounced back.

And the RBI? It will look only at inflation as these growth numbers do not help it make interest rate decisions. Thus the PMI data us good for the markets and we can only hope that the IIP which comes in on Monday, reflects the same modest recovery.