The Nikkei India manufacturing Purchasing Managers’ Index (PMI), as the accompanying chart shows, continues with a muted expansion, as the manufacturing sector recovers from the twin blows of demonetisation and the changeover to the goods and services tax (GST).

But the input price sub-index shows continuous expansion and at a brisk pace. Its latest reading of 54.7 for May 2018 is a case in point—the expansion in the seasonally-adjusted manufacturing PMI is modest, but input prices are rising rapidly. A reading above 50 shows expansion, while one below 50 indicates contraction from the previous month. As the PMI report for May said, “Higher cost burdens were widely attributed to greater raw material prices, with petrol and steel mentioned in particular. All broad market groups faced higher input prices, led by investment goods."

Yet, the PMI’s output price sub-index hasn’t been as strong, although the latest May 2018 reading, at 51.6, indicates that firms have regained a bit of pricing power. But it is far from across the board. The PMI report for May said, “Exactly 6% of surveyed companies raised their selling prices, which was largely linked to the passing on of greater cost burdens to customers." That should provide a modicum of comfort to the Reserve Bank of India’s monetary policy committee.

What then is the impact of this rise in input prices and a relatively tepid increase in selling prices? Obviously, it implies firms are facing pricing pressures. These pressures can of course be mitigated as long as demand rises and sales increase.

The March quarter earnings show that Nifty sales growth was strong, but Ebitda (earnings before interest, tax, depreciation and amortization) margins fell a bit from the December quarter. But since then, oil prices have moved up, as has the Bloomberg Commodity Index, while the rupee has depreciated. June quarter corporate margins will see increased margin pressure.

What about demand? Said the manufacturing PMI report for May, “…the rate of increase slowed to a modest pace. Greater production in consumption and intermediate groups continued to outweigh a decline in investment goods."

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