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India’s manufacturing sector is showing its clearest signs yet of Iran war- strain, with the HSBC Flash India Manufacturing PMI falling to 54.3 in May from 54.7 in April — its second-weakest reading in close to four years and the first PMI release in which surveyed businesses explicitly named the Middle East war as a demand headwind.

What the number means

At 54.3, manufacturing remains in expansion territory — above 50 — but the direction and the context both matter. This is the second-lowest reading since mid-2022, ahead only of March 2026. The long-run average for India’s manufacturing PMI sits close to this level, meaning the sector is no longer outperforming its historical trend — it is merely keeping pace while absorbing a significant external cost shock.

Export orders: The most alarming detail

New export orders recorded their weakest expansion in 19 months — the slowest since September 2024. Goods producers saw the second-slowest rise in international sales since that date. Survey panellists named competitive pressures, challenging demand conditions, disruptions to travel, and the war in the Middle East as explicit drags on sales. This is consequential: export order weakness today becomes output weakness in the coming months as the pipeline thins.

Input costs at a four-year high

Manufacturing input price inflation hit its steepest level since July 2022 in May. Firms reported higher prices across energy, food, fuel, gas, iron, leather, oil, plastics, rubber, steel, and transportation — a comprehensive list that captures both the direct commodity impact of Hormuz disruption and the indirect effect of rupee depreciation making every imported input more expensive in rupee terms.

Despite this, firms raised output prices at the weakest pace since January — absorbing cost increases rather than fully passing them through. This is simultaneously a demand management decision and a margin compression signal that will show up in corporate earnings if sustained.

Stockpiling as a coping mechanism

The one clearly positive element in the manufacturing data is inventory behaviour. Manufacturers are stockpiling aggressively — buying levels rose at the fastest pace in three months, stocks of purchases increased at the fastest rate in three months, and finished goods inventories rose for the second consecutive month at the strongest pace in 11 years. This stockpiling is partly precautionary — firms hedging against supply chain disruption — and partly reflects delivery lead time concerns as logistics networks absorb the Hormuz- disruption.

As HSBC Chief India Economist Pranjul Bhandari noted, this inventory building provided crucial support to the manufacturing PMI even as output and new order growth moderated. Without it, the headline number would have been weaker still.

What to watch next

The manufacturing PMI trajectory through June and July will be the definitive test of how deeply the Iran war has penetrated India’s industrial economy. If export orders continue to weaken, if input cost inflation does not moderate as the oil price correction seen on May 20 feeds through, and if domestic new order growth continues its near four-year low trajectory — the manufacturing PMI could test the 53 handle by Q2 FY27. That would represent a meaningful growth deceleration from the 56-58 range that characterised India’s manufacturing boom through FY25 and early FY26.

This article is for informational purposes only and does not constitute investment advice. Please consult a qualified financial advisor before making any investment decisions.