India's factory growth climbs to 7-month high on surging demand, PMI shows

India's manufacturing sector witnessed a significant expansion in September, marking its fastest growth in seven months, according to a private survey. The HSBC India Manufacturing Purchasing Managers' Index (PMI) surged to 55.1, up from a five-year low of 52.8 in August. However, this figure was still below the preliminary estimate of 55.7 and had dipped from the previous month's reading of 55.9. The PMI, which surpasses 50.0 to indicate growth, had reached its highest level since February.

The increase in activity was primarily driven by a surge in new orders, which rose at the fastest pace since February. This was due to heightened demand for electronic, food, pharmaceutical, and textile products. Export orders also saw a boost, fueled by heightened client demand from Brazil, Europe, the UAE, and the US. The expansion in production accelerated to its strongest pace since May, supported by new business orders and robust demand.

Companies increased their purchases of materials and restocked inventories to prepare for anticipated sales. Finished goods inventories recorded their second-largest increase in nearly 12 years, indicating a shift from leaner stock levels. Pranjul Bhandari, chief India economist at HSBC, noted that the rising demand led to a return in hiring, with employment expanding at its strongest rate since May.

This recovery followed an outright decline in August, marking the first decrease in factory jobs in over two-and-a-half years.

Business confidence also reached a four-month high in September, buoyed by new inquiries and expectations of sustained demand. However, input cost inflation rose more rapidly than in August, driven by higher prices for electronic components, pharmaceutical items, and steel. Despite this, the rate of inflation remained below its long-run average.

Selling prices increased from August, albeit at a modest pace, which was still below trend. India's inflation has remained above the Reserve Bank of India's (RBI) 4% medium-term target for the third consecutive month in August, largely due to sharp increases in energy and food costs. To address rising inflation, the RBI is anticipated to raise interest rates by a total of 50 basis points this year, reaching 5.75%.