Moneycontrol Pro Panorama | Mixed signals on economy

economy

Dear Reader,

Two sets of numbers on the macro economy caught the attention of readers this morning.

They showed that India’s economic landscape is flashing mixed signals, with the manufacturing sector showing a spark of resilience while industrial output struggles to find its footing.

The latest HSBC India Manufacturing Purchasing Managers’ Index (PMI) for June 2025 has surged to a 14-month high of 58.4, up from 57.5 in May, painting a picture of buoyant factory activity driven by robust demand and export orders.

But IIP weakens... 

Yet, the Index of Industrial Production (IIP) for May tells a more sobering story, slumping to a nine-month low of 1.2 per cent, dragged down by disruptions in electricity and mining. We had pointed out that India’s industrial engine sputtered at the start of FY26 as consumer goods production slumped.

This stark contrast throws a curveball at the Reserve Bank of India (RBI) as it navigates monetary policy amid global trade headwinds and domestic demand fragility.

The PMI’s stellar June showing reflects a manufacturing sector firing on multiple cylinders. New orders are pouring in, export demand is hitting near-record highs, and job creation is picking up pace.

But flip the coin, and the IIP data reveal cracks in the growth story. May’s 1.2 per cent growth, down from 2.7 per cent in April, reflects a slowdown driven by a 5.8 per cent contraction in electricity output and flat mining activity. And the IIP is a far more broad-based measure of the economy than the manufacturing PMI.

Heavy monsoon rains played spoilsport, dousing demand for power and disrupting mining operations. Aditi Nayar, Chief Economist at ICRA Ltd, points out that last year’s scorching May temperatures had spiked electricity consumption, making this year’s moderation look sharper by comparison.

A conundrum

This divergence poses a conundrum for the RBI. The central bank has already slashed rates by 100 basis points since February, aiming to spur investment and growth. The capital goods uptick in IIP suggests this stimulus is gaining traction in capacity-building sectors.

Rural consumption, however, shows promise, with economists like Anitha Rangan from Equirus Securities betting on a reversal in consumer goods trends as rural momentum builds.

The global backdrop adds another layer of complexity. With US tariffs set to tighten and geopolitical tensions simmering in the Middle East, export-driven optimism could face headwinds.

HSBC’s report flags uncertainties around competition and shifting consumer preferences, which could temper manufacturer confidence. Meanwhile, the tepid IIP growth in the first two months of Q1 FY26 suggests industrial output may not provide the robust support needed for the 7.4 per cent GDP growth seen in Q4 FY25.

ICRA’s Nayar warns that industrial GVA growth could take a hit this quarter, putting pressure on overall economic momentum.

For the RBI, the path forward is a delicate balancing act. The PMI’s strength argues against further rate cuts, as overheating risks could emerge if manufacturing continues its upward trajectory.

Yet, the IIP’s weakness, particularly in consumer segments, suggests the economy isn’t out of the woods. A pause in rate changes seems likely at the next meeting, with the RBI keeping its powder dry to monitor how global trade dynamics and domestic demand evolve.

So, what will the RBI do?

For now, the central bank will likely hold steady, watching closely as rural demand, global trade, and monsoon effects shape the next chapter of India’s growth story.

In other news, Manas Chakrvarty analyses an RBI report that suggests India’s consumption boom is powered by affluent borrowers and Sneha Pandey discusses whether retail investors are warming up to direct investments in government bonds.

Also, in today’s Chart of the Day, I write on the state of affairs in India’s microfinance industry.

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Dinesh Unnikrishnan Moneycontrol Pro