Commerzbank’s report on India highlights the September flash PMIs indicating stronger economic activity as the third quarter wraps up, with manufacturing and services indices both significantly above the 50 mark. Domestic demand remains strong; however, heightened input and output prices in manufacturing keep inflation risks elevated. The bank suggests that the Reserve Bank of India (RBI) will likely adopt a cautious approach moving forward, while the USD/INR remains buoyed by overall Dollar strength and capital outflows.
Growth momentum with price pressures
The flash manufacturing PMI for September jumped to 55.7 from 52.8 in August, reaching its highest point in seven months, largely due to an uptick in domestic demand. This index is well above the neutral 50 level and also surpasses its long-term average. New orders showed substantial acceleration, outpacing growth in the services sector, primarily driven by increased demand for electronics, pharmaceuticals, and food products.
Meanwhile, the flash services PMI rose to 55.8 from 54.1 in August, marking a three-month high, though it fell short of the May 2026 peak of 59.8. Growth in new business saw reinforcement, facilitated by stronger demand for transportation and software services. Nevertheless, the rise in new export orders fell behind that of manufacturing.
In summary, the September flash PMIs indicate that economic activity is picking up strength as Q3 concludes, buoyed by solid domestic demand in both manufacturing and services. Yet, ongoing high input and output price pressures, particularly in manufacturing, suggest that inflation risks are still significant.
Year-to-date CPI inflation stands at an average of 3.8%, which is below the RBI’s forecast of 5.0% for FY2026-2027. However, persistent cost pressures are expected to keep policymakers cautious. This bolsters the expectation that the RBI will remain in a wait-and-see position as rising global crude oil prices and second-round effects continue to pose inflationary risks.
In the foreign exchange market, USD/INR rose by 0.2% to 95.93 yesterday, benefiting from broad Dollar strength and foreign portfolio outflows. So far this week, foreign investors have sold a net total of USD338 million in equities and USD134 million in bonds. However, RBI Deputy Governor Poonam Gupta noted there is a “fair case” for INR appreciation due to stretched valuations in foreign markets, robust domestic bank balance sheets, and the likelihood of Indian bonds being included in global indices.
