Factory PMI Cools to 54.7 in October, but Export Orders Hit a Six-Month High and Firms Stockpile at a Record Pace

India's factories kept expanding in October, but the mix of that growth shifted in a way that matters for the months ahead. The HSBC India Manufacturing Purchasing Managers' Index, compiled by S&P Global and released on Monday, eased to 54.7 from 55.1 in September. The final reading also came in below the flash estimate of 54.9 published late last month.

Any reading above 50 signals expansion, and 54.7 is still comfortably above both that line and the survey's long-run average. The story is in the components.

Exports did the heavy lifting

New export orders rose at their fastest pace in six months. Manufacturers reported stronger demand from a wide spread of markets, including the United States, the United Kingdom, the UAE, Saudi Arabia, Oman, Canada, Indonesia, Bangladesh, Sri Lanka and Nepal. HSBC's chief India economist, Pranjul Bhandari, credited strong international demand for the jump in export orders and the robust rise in output that followed.

Domestic demand was a different picture. Total new orders, which had hit a seven-month high in September, slipped slightly. Output growth also softened from the previous month, even though it remained sharp by historical standards.

A record stockpiling drive

The most unusual figure in the survey was inventory. Companies built up stocks of finished goods at the fastest pace since the survey began more than 21 years ago, and they added to raw material inventories at the quickest rate in eight months. Firms described these as precautionary buffers against possible shortages in a volatile global environment.

That caution is easy to understand. With shipping through the Strait of Hormuz disrupted and Brent crude still trading above $110 a barrel, manufacturers face a real risk of delayed inputs and sudden cost spikes. Building stock now is a hedge. The catch is that heavy inventory building can flatter output figures for a few months; if end-demand at home does not pick up, factories may later need to slow production while they work through those stocks.

Purchasing activity told a similar story. Growth in raw material buying slowed to its weakest level in the current 64-month run of expansion, suggesting firms front-loaded some purchases earlier.

Prices cool, hiring stays thin

The better news for policymakers was on prices. Input cost inflation eased to its lowest level since February, and the rise in factory selling prices was the weakest in just under four years. That is notable given the surge in global energy prices, and it suggests manufacturers are absorbing costs rather than passing them on, either because domestic demand is softer or because competition is keeping a lid on pricing.

For the Reserve Bank of India, which has already turned to rate increases to contain inflation risks (see our earlier coverage), softer factory-gate inflation is a modest argument for caution on further tightening. It does not settle the debate, since fuel and food prices carry more weight in consumer inflation than factory output prices do.

Employment rose for a second straight month, but only slightly. Business confidence slipped from September and stayed below its long-run average, with about 18% of firms expecting output to rise over the next year. Those that were upbeat pointed to new client enquiries and demand for automation and technology products.

The takeaway

October's survey shows an industrial sector that is still growing at a healthy clip but leaning more on export markets and stockbuilding than on domestic buyers. Exporters are the clear winners for now. The signals to watch in November are whether home demand recovers after the festive season and whether the inventory build starts to unwind.

This is an original summary based on public reporting. See our editorial policy for how we source, write, and correct our stories.