India's manufacturing growth decelerated in May, slipping to 57.5 from April's 58.8, marking a three-month low, as revealed by the HSBC final India Manufacturing Purchasing Managers' Index. This dip, below the initial estimate of 58.4, was attributed to a heatwave that prompted certain companies to scale back working hours. However, despite this moderation, factory activity remained robust overall, buoyed by vigorous international sales.

High temperatures, exceeding 50 degrees Celsius (122'F) in some northern and western regions, disrupted normal operations for some businesses. Nonetheless, the manufacturing sector sustained expansionary momentum, albeit at a slower pace, driven by a softer increase in new orders and output.

On the bright side, new export orders surged at the fastest rate in over 13 years, indicating strong demand across various regions. The sustained expansion has kept the index above the critical 50-mark, which delineates expansion from contraction, for nearly three years.

Maitreyi Das, Global Economist, HSBC, noted, Manufacturers were only able to pass on a part of this increase to consumers, resulting in a squeeze in manufacturing margins.

Despite election-related disruptions, the output and new order PMI sub-indexes, though at three-month lows, reflected upbeat demand and favourable economic conditions. Moreover, international sales soared at the quickest pace in over 13 years, extending the streak of rising export orders for 26 consecutive months.

Firms exhibited the highest level of positive sentiment in over nine years, anticipating sustained demand, which prompted a brisk pace of job creation, the fastest since November 2022. However, robust demand also fuelled a sharper uptick in both input and output prices.

Corporate cost burdens escalated in May, with the inflation rate hitting its joint-highest level in 21 months. Prices charged to customers rose at the fastest pace in eight months. Despite these cost pressures, manufacturers were constrained in passing on the full extent of these increases to consumers, squeezing margins.

Inflation in India has remained within the Reserve Bank of India's target range of 2%-6% since September 2023. A source poll predicted it to stay below 5.0% until the end of the fiscal year 2025-26. The RBI is anticipated to maintain its repo rate on June 7, with a potential rate cut later in the October-December quarter, according to the source's survey.

(Source: Reuters & ET)