India’s factory growth hits 7-month high as demand rebounds: PMI

India’s manufacturing sector staged a strong recovery in September, with factory activity expanding at its fastest pace in seven months as robust demand boosted new orders, output and hiring, a private survey showed on Thursday.

The HSBC India Manufacturing Purchasing Managers’ Index (PMI), compiled by S&P Global, rose to 55.1 in September from 52.8 in August. The August reading was the lowest in five years. However, the September figure was below the preliminary estimate of 55.7.

A PMI reading above 50 indicates growth in manufacturing activity. New orders rose at their fastest pace since February, driven by stronger demand for electronic, food, pharmaceutical and textile products, the survey showed.

Export orders also accelerated, with manufacturers reporting stronger demand from customers in Brazil, Europe, the United Arab Emirates and the United States.

Factory output rose sharply in September, with the rate of expansion reaching its strongest level since May. The increase was supported by stronger new business and sustained demand.

“Companies bought more materials and built up stocks to prepare for anticipated sales,” Pranjul Bhandari, chief India economist at HSBC, said.

Finished-goods inventories recorded their second-largest increase in nearly 12 years, indicating a clear shift towards higher stock levels after manufacturers had operated with leaner inventories.

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Hiring rebounds

The improvement in demand also encouraged manufacturers to resume hiring.

Employment expanded at its strongest pace since May, recovering from an outright decline in August. The August contraction had marked the first fall in factory employment in two-and-a-half years.

Business confidence also improved, reaching a four-month high in September. Manufacturers cited stronger new enquiries and expectations of sustained demand as reasons for their optimism.

Cost pressures rise

The recovery in demand was accompanied by renewed cost pressures.

Input-cost inflation accelerated from August, driven by higher prices for electronic components, pharmaceutical products and steel. However, the rate of inflation remained below its long-run average.

Manufacturers also raised selling prices from August, although the pace of increase remained modest and below the historical trend.

Inflation remains a concern

The stronger manufacturing performance comes as India continues to grapple with elevated inflation. Retail inflation remained above the Reserve Bank of India’s 4 per cent medium-term target for the third consecutive month in August, driven by higher energy and food costs.

The RBI is expected to raise interest rates by a cumulative 50 basis points this year to 5.75 per cent, according to a Reuters poll.

The September PMI data nevertheless point to renewed momentum in India’s factory sector, with stronger orders, output, hiring and business confidence signalling an improvement after three months of slowing activity.