Business momentum in India’s manufacturing sector has taken a U-turn. The seasonally adjusted HSBC India Manufacturing Purchasing Managers’ Index rose to a seven-month high of 55.1 in September after hitting a five-year low of 52.8 in August. Faster increases in new orders and output aided recovery and supported job creation. Higher demand for electronic, food, pharmaceutical and textile products drove a sharper increase in new business intakes.
Indian manufacturers upgraded their output forecasts. The PMI sub-index gauging business confidence rose to a four-month high in September. This optimism was underpinned by new enquiries in the pipeline and expectations that demand conditions will remain favourable, said the PMI survey. In line with future sales expectations, companies increased stocks. Holdings of finished products rose for the third month in a row in September and at the second-fastest pace in 11-and-a-half years.
But this may well be a one-month wonder. The PMI average for the second quarter of the fiscal year (July-September) stood at 53.8, its lowest since the same period in 2021. With Brent crude oil at $98 per barrel levels and food inflation set to pinch harder, the road ahead for the Indian economy is bumpy.
“The macro-outlook is likely to become more challenging in Q3FY27 (October-December), as the weak and uneven monsoon, alongside rising El Niño risks, could feed into food prices,” said Motilal Oswal Financial Services report dated 25 September.
High input costs are adding pressure across transportation, energy and manufacturing activities. In August, inflation measured via the wholesale price index (WPI) surged to around 10%. Inflation measured via the consumer price index (CPI) or retail inflation rose to 4.82% with food inflation at 5.95%.
“The gap between WPI and CPI inflation will remain elevated as long as the West Asia crisis persists,” said Gaura Sen Gupta, chief economist, IDFC First Bank. A widening gap between these metrics indicates the weak pricing power of businesses.
The odds of an interest rate hike by the Reserve Bank of India (RBI) on 7 October, are rising. RBI has maintained a pause on interest rates so far in 2026. Morgan Stanley expects RBI to begin hiking in October against its prior expectation of December, and tighten a cumulative 100 basis points (bps) through four consecutive 25 bps hikes, taking the terminal policy rate to 6.25% by April 2027.
Higher food prices, tighter liquidity and elevated borrowing costs would eventually dent customers’ purchasing power, thus weighing on credit-sensitive sectors and consumption. For manufacturers, there is little room to raise prices and protect margins.
The PMI survey showed that higher prices for electronic components, pharmaceutical items and steel pushed up overall cost burdens in September. The rate of input cost inflation accelerated from August, but remained below its long-run average.
Selling prices also increased at a quicker pace, but the increase was modest. “In Q1FY27, companies were able to pass on some of the rise in input costs to consumers which supported profit growth. The longer the supply-shock persists, companies will continue to pass on input cost pressures to consumers and after a point, sales volume growth could moderate,” Sen Gupta added.