Whalesbook
Mixed Signals Emerge from India's PMI Data
March's Purchasing Managers' Index (PMI) data reveals mixed signals for India's economy. While the services sector, a consistent growth engine, shows signs of moderating from its robust pace, the manufacturing sector is experiencing a more pronounced slowdown. This contrast, driven by global geopolitical events and rising domestic costs, highlights underlying economic complexities.
Manufacturing Slumps, Services Moderate
India's Services Purchasing Managers' Index (PMI) registered 57.5 in March, a retreat from 58.1 in February, reaching a 14-month low. While the sector continues to expand above the 50-point growth threshold, this indicates a cooling of momentum. In contrast, the manufacturing sector saw a steeper decline, with its PMI falling to 53.9 in March from 56.9 in February, reaching its weakest point in nearly four years, specifically since September 2023.
Geopolitical Shocks and Input Cost Pressures
The main driver of the manufacturing slowdown is escalating geopolitical tensions in the Middle East. Surveyed companies cited these conflicts as a major cause of market instability, leading to energy shocks and a significant surge in input costs. Indian companies saw the steepest rise in operating expenses in nearly four years, with specific price pressures noted for raw materials including chemicals, steel, oil, and energy. This intensified cost environment, coupled with heightened uncertainty among clients and end-consumers, directly restricted demand and softened new order growth, falling to its slowest pace since mid-2022.
Services Sector Resilience and Easing Demand
While the services sector also moderated, the slowdown was less severe. The HSBC India Services PMI Business Activity Index eased to 57.2 in March from 58.1 in February. New business growth within services moderated to a three-year low, partly due to softer domestic demand and competition. However, export orders remained strong, hitting a recent high due to broad international demand. Business confidence in services jumped to a year-high in February, according to HSBC data, showing underlying optimism despite demand shifts.
Overall Activity Cools
The combined effect is seen in the HSBC Flash India Composite PMI, which fell to 56.5 in March from 58.9 in February. This signals the weakest pace of private sector activity growth in nearly three-and-a-half years, its lowest since October 2022.
Global Context and India's Relative Strength
Globally, manufacturing activity saw a modest slowdown in March, with the J.P. Morgan Global Manufacturing PMI® posting 51.3, down from February's 51.9. While the United States and Eurozone saw mild growth accelerations, China and Japan experienced easing output expansion. India's performance in February, with manufacturing at 56.9 and services at 58.1, placed it ahead of major economies like the US, China, and Germany, showing relative resilience as global trends cooled.
Sectoral Drivers and Resilience
The services sector continues to be a cornerstone of India's economy, accounting for approximately 55% of GDP and driving growth. Projections indicate strong continued growth for IT services, expected to exceed $176 billion in 2026, propelled by increasing demand for AI-driven solutions. While manufacturing faces headwinds, it still shows expansion above the 50-point mark. Notably, Indian manufacturers saw their strongest export growth since September 2023, and employment rose at the fastest pace in seven months, suggesting underlying capacity and demand. Despite rising input costs, many firms absorbed these expenses, leading to only modest increases in output prices.
Macroeconomic Linkages: Rupee, Inflation, and Growth Outlook
March data coincides with significant pressure on the Indian Rupee. The currency depreciated by approximately 9.9% in fiscal year 2026, its steepest annual fall since 2012, breaching the 95 mark against the US dollar for the first time. Inflation, while accelerating to 1.33% in December 2023, remained below the RBI's tolerance band. The Reserve Bank of India maintained its key repo rate at 5.25% in February 2024, prioritizing growth support. However, rising crude oil prices pose a significant risk to inflation outlooks. Despite these challenges, India's GDP growth forecast for FY26 remains robust, with projections from institutions like the IMF and Assocham ranging between 7.3% and 7.6%, largely driven by strong domestic consumption and government spending.
Risks and Challenges Ahead
Geopolitical Contagion and Inflationary Spiral
The ongoing conflict in the Middle East presents the most significant risk, with the potential to escalate energy shocks and further inflate input costs. A sustained rise in crude oil prices could not only widen India's trade deficit but also fuel domestic inflation, complicating the monetary policy stance and potentially straining corporate earnings. The recent surge in input costs for manufacturers, the steepest in over three years, could translate into sustained price pressures if not managed effectively.
Manufacturing Vulnerability and Demand Slowdown
The sharp decline in the manufacturing PMI to a near four-year low signals underlying weaknesses that extend beyond temporary shocks. A prolonged slowdown in new orders, combined with global economic uncertainty and the impact of US tariffs on exports, could drag down industrial output and employment growth. While exports showed strength in March, a sustained dip in domestic demand, which has begun to ease in services, could exacerbate manufacturing challenges.
Currency Depreciation Risks
The significant depreciation of the Indian Rupee against the US dollar, exacerbated by global tensions, adds another layer of risk. A weaker rupee increases the cost of imported goods, particularly essential energy and raw materials, potentially feeding into inflation and impacting import-reliant sectors. The currency's volatility highlights broader global economic uncertainties affecting emerging markets.
Demand Elasticity and Margin Squeeze
While companies have absorbed some cost increases, the intensity of rising input prices, especially for key commodities, puts pressure on margins. If demand does not keep pace or companies are unable to pass on costs effectively, profitability could be squeezed, impacting investment and hiring decisions in both manufacturing and services.
Outlook Remains Positive Despite Headwinds
Despite the current headwinds, India's economic trajectory for fiscal year 2026 is expected to remain positive, primarily propelled by robust domestic consumption and sustained government investment. Projections from major international bodies such as the IMF and World Bank indicate India will continue to be a significant growth engine globally, with GDP growth estimates for FY26 hovering between 7.3% and 7.6%. The services sector, bolstered by advancements in IT and AI, is anticipated to maintain its strong growth momentum. While manufacturing faces a more challenging environment, its continued expansion above the 50-point mark, coupled with strong export performance, suggests a path towards stabilization. The Reserve Bank of India is likely to maintain a cautious, neutral monetary policy stance, balancing growth imperatives with inflationary concerns arising from external factors like oil price volatility.