India's Exports Surge as Domestic Demand Weakens

ECONOMY
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AuthorIshaan Verma|Published at:
India's Exports Surge as Domestic Demand Weakens
Overview

India's private sector activity grew at its slowest pace in over three years in March, with the Composite PMI falling to 56.5 from February's 58.9. Domestic demand weakened significantly, but export orders reached an all-time high. Companies faced rising input costs from the West Asia conflict and high oil prices, squeezing margins. Businesses absorbed much of this cost, though consumer prices still rose notably. Manufacturing output grew at its slowest rate since August 2021, and overall sales expanded the least in over a year.

India's Private Sector Sees Slowdown Amidst Export Boom

Private sector growth in India slowed sharply in March, reaching its lowest expansion rate in over three years. The HSBC Flash India Composite PMI fell to 56.5, down from 58.9 in February. This signals a cooling economy, contrasting a significant softening in domestic demand with a record surge in international orders. While companies are capitalizing on global opportunities, they are contending with weaker demand at home.

Manufacturing activity saw the most pronounced slowdown. Its PMI dropped to a four-and-a-half-year low of 53.8, showing factory output growth near stagnation. This was the weakest expansion since August 2021. Overall private sector sales grew at their slowest rate in over a year. These trends suggest rising prices and global uncertainties are impacting consumer spending and business investment.

Rising Oil Prices Fuel Cost Pressures

The conflict in West Asia has sharply increased India's energy import costs. India's crude oil basket averaged $111-117 per barrel in March, a jump of over 60% from February. Daily oil prices briefly neared $156 per barrel. This surge intensified cost pressures, with input costs rising fastest in nearly four years due to higher raw material and energy prices.

Businesses absorbed much of these costs, allowing consumer prices to rise at their sharpest rate in seven months. However, this ability to absorb costs could be strained if prices stay high, possibly forcing companies to raise prices further. State-run oil companies are already facing severe margin pressure, with retail fuel prices held steady.

RBI Navigates Inflation and Growth Concerns

The Reserve Bank of India (RBI) faces a balancing act. Inflation rose to 3.21% in February 2026, remaining within the target band of 4% +/- 2%. However, soaring oil prices risk pushing inflation higher. At the same time, the slowdown in domestic demand and manufacturing suggests a need for supportive economic policies. The central bank's Monetary Policy Committee (MPC) has kept the repo rate at 5.25% with a neutral stance, signaling a pause in rate cuts and prioritizing economic stability.

Analysts expect the RBI to hold rates steady at its April meeting, likely focusing on managing market concerns about oil prices rather than hiking rates. The RBI forecasts FY27 inflation between 4.0% and 4.3%, anticipating controlled price pressures.

Sectoral Performance and Outlook

Manufacturing saw the most significant slowdown, hit by supply issues and weaker demand. The services sector also cooled, growing the least since January 2025. Some reports suggest disruptions in international travel impacted services. Despite these challenges, businesses are cautiously optimistic about output growth in the coming year, expecting better efficiency and more client inquiries.

Potential Risks and Downsides

Rising oil prices and supply chain issues pose serious risks. If the Strait of Hormuz, a key oil route, faces prolonged closure, supply disruptions could continue through April, keeping oil prices high. This would particularly affect India as a net oil importer, risking a wider current account deficit, pressure on the rupee, and more inflation. The sustainability of record export growth is also uncertain given a slowing global economy and trade tensions.

Companies might find their strategy of absorbing higher costs unsustainable, potentially leading to sharper price increases for consumers and further weakening domestic demand.

Outlook for 2026

Predicting India's economic path for 2026 is challenging. Some analysts forecast strong GDP growth of 6.5% to 6.9%, based on domestic drivers and trade agreements. However, immediate challenges are significant. Goldman Sachs, for example, lowered its 2026 growth forecast to 5.9%, citing currency weakness and high oil prices. They also expect a 0.50% interest rate hike to manage these pressures.

The coming months will be crucial to assess the Indian economy's true strength, given record exports against a weakening domestic market, ongoing inflation risks, and volatile energy prices. The RBI's success in controlling inflation without harming growth will be key to national economic stability.

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