India manufacturing growth picks up in October as domestic demand strengthens, PMI shows

India's manufacturing activity saw significant acceleration in October, with the HSBC India Manufacturing PMI rising to 59.2 from 57.7, indicating robust expansion driven primarily by strengthening domestic demand and efficiency improvements, despite a slowdown in export growth. While input cost inflation eased to an eight-month low, output charge inflation remained near a 12-year high for the second consecutive month as firms passed on costs amid strong demand. Business optimism, though slightly down from a seven-month high, remains robust due to positive expectations for GST reform and continued healthy demand.

Analysis

India's manufacturing sector demonstrated robust expansion in October, with the HSBC India Manufacturing Purchasing Managers’ Index (PMI) rising to 59.2, surpassing September's 57.7 and the preliminary estimate of 58.4. This significant increase indicates strong momentum, driven primarily by strengthening domestic demand, efficiency improvements, and new client acquisition. Output growth accelerated to match a five-year high, reflecting robust production capabilities.

Despite a moderation in input cost inflation to an eight-month low, output charge inflation remained at a nearly 12-year high for the second consecutive month. Manufacturers successfully passed on elevated freight and labor costs to customers, supported by strong end-demand. This suggests pricing power within the sector, even as international sales growth weakened and new export orders increased at their slowest rate in 10 months.

Employment continued its 20-month growth streak, albeit at a moderate pace, indicating sustained operational expansion. Business optimism, while slightly down from its seven-month peak, remains robust, underpinned by positive expectations surrounding Goods and Services Tax (GST) reform and continued healthy demand. This sustained domestic strength positions India's manufacturing sector favorably amidst global economic uncertainties.

Key Decisions for Investors

• Investors should monitor India's domestic demand indicators closely, as sustained manufacturing growth is heavily reliant on internal consumption and investment.
• Evaluate companies within the Indian manufacturing sector for their pricing power and ability to maintain margins, given the continued high output charge inflation despite easing input costs.
• Assess exposure to export-oriented Indian manufacturing firms, as weakening international sales growth could present headwinds despite overall domestic strength.
• Consider the long-term implications of anticipated GST reforms and robust domestic demand, which could provide structural tailwinds for select Indian manufacturing companies.