India's HSBC manufacturing PMI declined to 54.2 in June, the second-weakest since mid-2022. Cooling demand and weak exports may push the RBI toward rate cuts. Services PMI due next week.
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India's factory activity expanded at its slowest pace in four years during June, with the HSBC Manufacturing PMI dropping to 54.2 from May's 55.0, S&P Global said in a survey released Monday. The reading was the second-lowest since mid-2022, trailing only March's 53.9. A PMI above 50 still marks growth, and the June figure matched the long-run series average.
New orders, a forward-looking indicator of demand, rose at their second-weakest pace since June 2022. Export orders were even softer. International sales grew at the slowest rate in 39 months, with S&P Global pointing to subdued demand from European clients as the main drag.
Capital goods output was particularly weak, the survey noted. That weighed on the overall production index, which also expanded at the second-slowest pace since mid-2022.
Firms showed little appetite for price increases. Output charges rose at their slowest rate in three months. Of the companies surveyed, 93% left fees unchanged from May. Input cost inflation eased to a four-month low, though panelists reported higher prices for chemicals, metals, petroleum products, and plastics.
Employment growth hit its slowest pace this year. 97% of firms kept headcount unchanged, citing adequate capacity.
Economists at HSBC said the data pointed to a gradual cooling of the domestic economy. The RBI's monetary policy stance is likely to factor in weaker growth alongside inflation dynamics, they added.
The demand slowdown comes as Indian household debt has climbed to 45.5% of GDP, driven partly by consumption loans – a link our earlier coverage noted. Higher debt burdens may weigh on discretionary spending, amplifying the manufacturing slowdown.
For the RBI, the combination of cooling growth and contained core inflation strengthens the case for rate cuts before year-end. The next monetary policy review is scheduled for August 6-8. HSBC economists said the data makes it more likely the central bank will pivot toward a neutral bias at that meeting, setting the stage for an eventual cut.
A rate cut would typically narrow the rupee's carry advantage over US Treasury yields, putting pressure on the currency. Yet the RBI has signalled a willingness to manage volatility rather than defend a specific level. The central bank holds a $38 billion net short forward position, suggesting it is prepared to absorb selling pressure.
Export-oriented firms in chemicals and textiles could see margins improve if the rupee depreciates further. A weaker rupee boosts the rupee value of export earnings. The trade-off is that it raises import costs for industries reliant on crude oil and specialty chemicals.
Stocks tied to domestic demand, such as consumer goods and auto components, face margin pressure as pricing power erodes. The slowdown in new orders suggests inventory destocking may follow in coming months.
The next scheduled data point is the services PMI, due next week, which will show whether the weakness extends beyond manufacturing.
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