India’s manufacturing sector expanded at its slowest pace in nearly five years in July, highlighting a loss of momentum in one of the economy’s key growth engines even as easing cost pressures strengthen expectations that the Reserve Bank of India (RBI) will leave interest rates unchanged this week.
The latest S&P Global HSBC India Manufacturing Purchasing Managers’ Index (PMI) fell to 53.5 in July from 54.2 in June, marking its weakest reading since August 2021 and coming in slightly below the preliminary estimate of 53.9.
Although the index remained above the 50-point threshold that separates expansion from contraction, the latest reading points to moderating manufacturing activity as softer domestic demand and cautious business spending weigh on new orders and hiring.
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The survey suggests that while India’s manufacturing sector continues to grow, the pace of expansion has slowed considerably amid challenging market conditions, leaving policymakers to balance slowing economic momentum against emerging inflationary risks.
The slowdown was driven primarily by softer demand. New orders, one of the most closely watched indicators of future production, increased at their second-slowest pace in more than four years as manufacturers reported weaker customer demand and reduced client interest.
The subdued order flow indicates that businesses remain cautious about expanding production despite broader improvements in India’s economic outlook.
Export demand showed some improvement, with overseas orders growing at their fastest pace since April. However, export growth remained relatively modest after falling to a 39-month low in June, suggesting that external demand has yet to recover meaningfully.
Manufacturing output continued to increase at a pace broadly similar to June, but performance varied across industries.
Consumer goods producers experienced weaker conditions, reflecting softer household demand, while manufacturers of intermediate and capital goods reported comparatively stronger activity, supported by infrastructure investment and industrial spending.
Hiring Momentum Continues to Fade
The survey also pointed to a gradual cooling in labor market conditions. Manufacturers increased employment for the 29th consecutive month, extending one of the longest hiring streaks in recent years.
However, job creation slowed for a third consecutive month and expanded at its weakest pace since the hiring cycle began, indicating companies are becoming more cautious about adding workers as demand growth moderates. The slower pace of recruitment suggests firms are prioritizing productivity improvements and cost management over workforce expansion until demand strengthens more convincingly.
Encouragingly for policymakers, inflationary pressures within the manufacturing sector eased during July.
Input cost inflation slowed to a five-month low despite continued increases in transportation expenses, allowing manufacturers to limit price increases for customers. Selling prices rose only modestly and broadly in line with June, indicating businesses remain reluctant to pass higher operating costs fully onto consumers amid still-fragile demand.
The moderation in cost pressures provides some reassurance that producer price inflation has not yet translated into widespread pricing pressure across the manufacturing sector.
Business sentiment also improved slightly from June’s recent low, with companies expressing optimism that stronger demand and continued infrastructure investment would support activity during the coming months.
RBI Expected to Keep Rates Unchanged
The PMI survey arrives just days before the Reserve Bank of India’s Monetary Policy Committee announces its latest interest rate decision.
Economists overwhelmingly expect policymakers to leave benchmark interest rates unchanged. According to a Reuters poll, 68 of 72 economists anticipate that the RBI will maintain its current policy stance at Wednesday’s meeting.
Unlike many emerging market central banks that have tightened monetary policy in response to rising global energy prices following the U.S.-Israel conflict with Iran, the RBI has so far resisted raising borrowing costs.
Central banks across Europe, Australia, Indonesia, the Philippines, Singapore, South Korea and South Africa have all increased interest rates in recent months, while both the U.S. Federal Reserve and the Bank of Japan have also opted to leave rates unchanged.
The RBI’s relatively patient approach reflects confidence that inflation remains sufficiently contained to allow policymakers to continue supporting economic growth.
Although India’s consumer price inflation accelerated to 4.38% in June, exceeding the RBI’s 4% target for the first time in 17 months, it remains comfortably within the central bank’s official tolerance range of 2% to 6%. Core inflation, which excludes volatile food and fuel prices, has also remained close to 4%, suggesting underlying price pressures are still relatively stable.
“Although core and underlying inflation have risen modestly, they remain within the RBI’s comfort zone. Consequently, a rate hike is unlikely in 2026 unless core inflation sustains above 4.5%,” said Samiran Chakraborty, Citi’s Chief India Economist.
RBI Governor Sanjay Malhotra also recently indicated that higher fuel prices have not yet translated into broader inflation across the economy. In an interview with The Hindu BusinessLine published last week, Malhotra said evidence of fuel costs feeding into generalized inflation remains limited.
However, policymakers are monitoring inflation expectations closely. A central bank survey conducted in May showed households expect inflation to rise, while wholesale inflation climbed sharply to 9.87% in June, raising concerns that producer price increases could eventually filter through to consumers.
While economists expect no immediate policy change this week, many believe the RBI is gradually moving toward a more hawkish stance.
“The MPC is likely to shift language acknowledging risks of firmer inflation and policy action ahead, while maintaining a data-dependent approach,” said Tanay Dalal, economist at Axis Bank.
Dalal expects higher wholesale prices to begin feeding into consumer inflation over the next three to four months.
“While the MPC may be able to look through the initial signs of firming inflation, a sustained uptick, coupled with rising inflation expectations could gradually reduce the room for such flexibility.”
Financial markets are already positioning for tighter monetary policy.
Interest rate swap markets currently imply approximately 75 basis points of cumulative rate increases over the next 12 months.
Rupee Remains Another Policy Challenge
Currency stability has become another important consideration for policymakers. The Indian rupee weakened to a record low ahead of the RBI’s June policy meeting, prompting calls for interest rate increases to support the currency, similar to actions taken by Indonesia and the Philippines.
Instead of raising rates, the RBI introduced measures designed to attract foreign capital, including eliminating capital gains tax for foreign investors in Indian government bonds and improving dollar deposit schemes for non-resident Indians.
Those initiatives have attracted nearly $40 billion in capital inflows, helping support the rupee without tightening monetary policy.
However, renewed tensions in the Gulf and higher global oil prices have once again placed pressure on the currency.
Trinh Nguyen, Senior Economist for Emerging Asia at Natixis, believes the pressure is unlikely to ease permanently until the RBI begins raising interest rates.
“If you compare India to similarly rated markets, it’s not the most compelling story from a real yields perspective,” Nguyen said.
“Fundamentally, I think the right call for India is higher rates. They are not going to do it (this) week but the longer they wait, the more they will be pushed to it.”