PMI: India's May factory activity remained strong despite high inflation

Demand showed signs of resilience in May, improving further in spite of another uptick in selling prices

India's factory activity expanded at a better-than-expected pace last month as overall demand remained resilient despite persistently high inflation, encouraging firms to hire at the fastest rate since January 2020, according to a private survey.

The survey comes just a day after official data showed Asia's third-largest economy expanded at an annual rate of 4.1% during the January-March quarter, its weakest in a year, amid rising risks from price pressures.

Still, the Manufacturing Purchasing Managers' Index, compiled by S&P Global, came in at 54.6 in May, slightly lower than April's 54.7 but above the 50-level separating growth from contraction for an eleventh month.

It was better than the Reuters poll median prediction of 54.2.

While new orders, a gauge of overall demand, increased strongly last month, albeit at a slower pace, foreign demand grew at its strongest pace since April 2011 despite worries over the Russia-Ukraine war, China's economic slowdown and high inflation.

"India's manufacturing sector sustained strong growth momentum in May," noted Pollyanna De Lima, economics associate director at S&P Global.

"In response to demand resilience, companies continued with their efforts to rebuild stocks and hired extra workers accordingly."

Firms hired workers at the quickest rate in nearly two and a half years, welcome news for the labour market. Unemployment rose to 7.83% in April from 7.60% in March, according to the Centre for Monitoring Indian Economy, a Mumbai-based private think tank.

But surging prices remained a major concern.

Although input price inflation eased a bit in May, output prices jumped at their fastest pace since October 2013, suggesting overall inflation would remain elevated over the coming months, which might aggravate the cost of living crisis.

"While firms appear to be focusing on the now, the survey's gauge of business optimism shows a sense of unease among manufacturers," added De Lima.

"The overall level of sentiment was the second-lowest seen for two years, with panellists generally expecting growth prospects to be harmed by acute price pressures."

The Reserve Bank of India, which surprised markets with a 40 basis point repo rate hike to 4.40% last month, is widely expected to hike rates aggressively over the next few months at least to combat soaring inflation.