India's manufacturing sector experienced a significant recovery in September, with the HSBC India Manufacturing Purchasing Managers' Index (PMI) jumping to 55.1 from a five-year low of 52.8 in August. According to reports from The Times of India and Upstox News Desk, this represents the strongest improvement in the sector's health in seven months and marks the end of a three-month slowdown. The September reading was also the highest since February, when it stood at 56.9, indicating sustained but moderated growth momentum. The average PMI for the second fiscal quarter stood at 53.8, which is the lowest since the same period in 2021, as noted by the survey. The latest figure was slightly below the Flash India Manufacturing PMI estimate of 55.7 released last month, indicating some moderation from initial expectations.
The manufacturing expansion was primarily driven by robust demand across multiple sectors, with new orders rising at the fastest pace since February. As reported by The Times of India and Upstox News Desk, the recovery in factory activity was supported by both domestic and overseas demand, with stronger new orders helping drive production higher. Stronger demand was observed for electronic, food, pharmaceutical and textile products, with firmer demand for electronic, food, pharmaceutical and textile products reportedly driving a sharper increase in new business intakes. Total sales increased at the fastest pace since February, supported by new business orders and high demand. Export orders also accelerated, with manufacturers citing increased business from clients in Brazil, Europe, the UAE and the US. Intermediate goods recorded the strongest growth in new orders and output, while capital goods saw only modest increases that were weaker than in August.
The manufacturing recovery led to a resumption in hiring, with employment creation picking up in September after a dip in August, with jobs growing at the fastest pace since May. According to The Times of India and Upstox News Desk, after a blip in August, job growth resumed in September, with the pace of employment expansion described by panellists as solid and the strongest since May. Companies bought more materials and built up stocks to prepare for anticipated sales, with finished-goods inventories rising for the third consecutive month and at the second-fastest pace in 11-and-a-half years (behind July). This signals a clear shift from leaner stock levels as companies prepare for increased demand. Stocks of purchases rose at the fastest pace in seven months and were well above the long-run average, indicating manufacturers' confidence in sustained demand. As noted by HSCB's chief India economist Pranjul Bhandari, "Companies bought more materials and built up stocks to prepare for anticipated sales. Finished goods inventories recorded their second-largest increase in nearly 12 years, signalling a clear shift from leaner stock levels."
Despite the manufacturing growth, cost pressures rose with input cost inflation increasing at a faster pace than in August, driven by higher prices for electronic components, pharmaceutical items and steel. According to The Times of India and Upstox News Desk, companies faced quicker increases in input costs and selling prices during September, with the rates of inflation remaining mild by historical standards. Selling prices also increased at a quicker pace but remained below trend, with the consumer-goods segment recording the sharpest increase in selling prices. Cost pressures were most intense in the intermediate-goods category and weakest among capital-goods producers. In August, inflation measured via the wholesale price index (WPI) surged to around 10%, while inflation measured via the consumer price index (CPI) or retail inflation rose to 4.82% with food inflation at 5.95%. As noted by IDFC First Bank's chief economist Gaura Sen Gupta, "The gap between WPI and CPI inflation will remain elevated as long as the West Asia crisis persists. A widening gap between these metrics indicates the weak pricing power of businesses."
The manufacturing recovery has boosted business confidence, with manufacturers becoming more confident about the months ahead and output forecasts upgraded during September. As reported by The Times of India and Upstox News Desk, the outlook was supported by a healthy pipeline of new enquiries and expectations that strong demand would continue. Overall positive sentiment reached a four-month high, reflecting the improved business environment. "India's factory sector ended the quarter on a firmer footing," said Pranjul Bhandari, chief India economist at HSBC, adding that "hiring resumed at its fastest pace since May, and manufacturers became more optimistic about the months ahead." However, challenges lie ahead as 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. The odds of an interest rate hike by the Reserve Bank of India (RBI) on 7 October are rising, with Morgan Stanley expecting RBI to begin hiking in October against its prior expectation of December.
