India’s Manufacturing: Weathering Heatwaves, Expanding Horizons

India’s manufacturing growth decelerated to a 3-month low in May due to a heatwave, reducing working hours for some firms. However, overall factory activity remained strong, supported by robust international sales, according to a business survey released on June 03, 2024.

Regional Heatwave Impact

In May, certain northern and western regions of Asia’s third-largest economy experienced temperatures exceeding 50 degrees Celsius (122°F). The final India Manufacturing Purchasing Managers’ Index (PMI) by HSBC, compiled by S&P Global, declined to 57.5 in May from April’s 58.8, falling short of the anticipated 58.4 preliminary estimates.

Resilient Expansion Despite Moderation

Despite a slight decrease, the index continued above its historical average and has stayed above 50, indicating expansion, for nearly three years. HSBC’s Maitreyi Das noted that while the manufacturing sector expanded in May, the pace moderated due to a gentler increase in new orders and output.

Surge in Export Orders

New export orders surged to their highest level in over 13 years, driven by widespread demand across regions. According to government data released on Friday, India’s economy grew 7.8% year-on-year in the January-March quarter, supported by robust manufacturing growth. Economists anticipate continued strong momentum throughout the year, surpassing the Reuters poll projection of 6.7%.

Optimistic Business Sentiment Drives Job Creation Surge

Companies expressed the most positive outlook in over 9 years, anticipating sustained demand. This has led to the fastest job creation rate since November 2022.

Inflationary Pressures and RBI Outlook

In May, corporate expenses escalated, with inflation reaching its highest level in 21 months, while customer prices surged at the quickest rate in eight months. Maitreyi Das noted that manufacturers managed to transfer only a portion of this rise to consumers, which led to a squeeze in manufacturing margins. Elevated costs for electronic components, packaging, plastics, and steel contributed to this situation.

In India, inflation has stayed within the Reserve Bank of India’s (RBI) target range of 2%- 6% since September 2023. A Reuters poll forecasts it will remain below 5.0% until the fiscal year 2025-26 ends. According to the same survey, the RBI is anticipated to maintain its repo rate on June 7, with a subsequent reduction in interest rates expected during the October-December quarter.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.