Business momentum in India’s manufacturing sector has marginally bounced back amid soaring crude oil prices and supply chain disruptions. The seasonally adjusted HSBC India Manufacturing Purchasing Managers’ Index (PMI) rose from a four-year low of 53.9 in March to 54.7 in April. Despite the uptick, the April headline index data signalled the second-slowest improvement in overall operating conditions in close to four years.
The two largest sub-components of the PMI, new orders and output, rose since March, but were lower than the readings seen in at least three-and-a-half years. A factor that can explain April’s manufacturing uptick is that consumers may have purchased before retail prices were raised significantly. Similarly, manufacturers build inventories before energy costs rise further. Finished goods inventories grew in April for the first time in six months, but the rate of accumulation was slight overall, said the PMI report.
Cost pressures are mounting rapidly; spillovers from the ongoing war are reflected in inflation. Manufacturers are feeling the cost pinch from higher prices of aluminium, chemicals, electrical components, fuel, leather, petroleum products, and rubber. The rate of input cost inflation climbed to its highest since August 2022. Subsequently, goods producers raised their selling prices to the greatest extent in six months as they strived to protect margins.
The annual rate of inflation measured via the wholesale price index (WPI) hit a multi-month high of 3.88% in March, up from 2.1% in February. WPI tracks the average price changes of goods sold in bulk before they reach consumers. “Our split of the WPI basket into input and output prices shows a sharper pick-up in input costs than output prices, but the extent of margin deterioration so far appears more moderate than in 2022 during the start of the Russia-Ukraine war,” said Nomura Global Markets Research in a report dated 27 April.
So far, the government has cushioned the adverse impact of high crude prices, but once state elections conclude, retail fuel prices might be hiked. This would push logistics costs higher for manufacturers and hit consumer purchasing power. Besides, the Indian rupee has significantly depreciated against the US dollar, breaching the 95/$ mark, making the consumption of imported raw materials dearer for manufacturing firms. Exchange rate volatility adds to imported inflation risk. So, while steep price hikes could protect margins, volume growth can suffer if demand weakens.
Meanwhile, new export orders expanded sharply, with the pace of growth reaching a seven-month high in April. Firms noted better demand from clients in several countries, including Australia, France, Japan, Kenya, mainland China, Saudi Arabia, the UAE, and the UK. Even so, the PMI sub-index tracking manufacturers’ business confidence on future sales slipped in April versus March, though the reading was at its second-highest mark since November 2024.
Investors have in the past favoured India, where economic growth is domestically focused, but with sustained high oil prices, external vulnerabilities on inflation, growth, and trade balances are rising.
India’s high-frequency indicators appear mixed, albeit largely constructive, with accelerating bank credit/retail lending to 16.1%/16.2% signalling improving demand, said the Emkay Global Financial Services report on 1 May. However, other concurrent indicators such as merchandise exports, core industries, and goods and services tax collections for March suggest near-term consolidation, it added.
The Reserve Bank of India (RBI) has kept the repo rate unchanged at 5.25% in April, with a neutral stance. With the inflation-growth math now getting complex, RBI is expected to remain on pause.