Whalesbook
April Economic Activity Picks Up
India's economy began the new fiscal year with increased business activity. The HSBC Flash Composite PMI rose to 58.3 in April from 57.0 in March, signaling a strong start. This upturn suggests robust domestic demand, even as private sector firms faced higher input costs and global uncertainties. The services sector continued its growth, with its PMI reaching 57.9, a slight rise from the previous month. This sustains the sector's key role in India's economic expansion, supported by strong urban demand.
Manufacturing Recovers Amid Rising Costs
Manufacturing activity led the April recovery, with its PMI climbing to 55.9. This is a significant improvement from 53.9 in March and marks a recovery from its four-year low recorded just last month. The resurgence was driven by faster growth in both output and new orders. Firms are building buffer stocks to offset potential supply chain disruptions, worsened by ongoing geopolitical tensions. Despite these positive trends, input costs surged, marking the steepest rise in over 3.5 years for materials like fuels and metals.
Inflationary Pressures Intensify
Despite positive headline figures, inflation remains a persistent challenge. Businesses reported substantially higher input costs and passed these onto consumers through increased selling prices. This trend is concerning due to the ongoing West Asia conflict, which drives volatility in global energy and freight costs. Brent crude nearing $100 per barrel directly threatens India's inflation outlook and external balance. Moody's Analytics projects India's inflation at 4.5%, among the highest in Asia-Pacific, highlighting the risk of imported inflation.
Geopolitical Risks and RBI's Challenge
The West Asia conflict continues to impact India via supply chain disruptions, higher energy prices, and market uncertainty. These geopolitical issues could prolong supply chain problems, posing risks of slower growth and higher inflation. Historically, similar disruptions have led to significant rupee depreciation, with the currency falling 9.9% in FY26, its steepest annual drop since 2012. The Reserve Bank of India (RBI) faces a tough balancing act: supporting growth while curbing inflation. The RBI kept its policy repo rate at 5.25% in its April 8 meeting, signaling caution. It forecasts GDP growth of 6.9% for 2026-27 and projects core inflation at 4.4% for FY27, showing a focus on sustainable disinflation despite external shocks.
Underlying Economic Vulnerabilities
While the current PMI data suggests recovery, underlying economic weaknesses remain. India's heavy reliance on crude oil imports (nearly 88% of its needs) makes it vulnerable to global price shocks and supply disruptions, especially from the West Asia region. Each $10 per barrel rise in crude prices could increase India's annual import bill by $13-14 billion, directly impacting inflation and the current account deficit. Cost-push inflation from higher energy and commodity prices, plus supply chain bottlenecks, could trigger stagflation if the geopolitical conflict continues. The RBI's task is harder as imported inflation could fuel broader price rises, risking growth sacrifices to control inflation. Unlike nations with more energy independence, India's economy is exposed to these external price shocks.