RBI Sees Improved Manufacturing Demand in Q3FY27, Cost Risks Remain

The RBI’s Industrial Outlook Survey indicates stronger demand expectations for India’s manufacturing sector in Q3FY27, supported by production and export prospects, while elevated raw material costs continue to pressure prices and profit margins.

India’s manufacturing sector is expected to record stronger demand in the third quarter of FY2026-27, although elevated input costs remain a concern, according to the Reserve Bank of India’s (RBI) Industrial Outlook Survey.

The survey found that business conditions improved in Q2FY27 compared with the previous quarter, supported by stronger production, order books and capacity utilisation. The Business Assessment Index (BAI) rose to 104.4 in Q2FY27 from 100.4 in Q1FY27, indicating an improvement in overall manufacturing activity.

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Manufacturing companies remain optimistic about the October-December 2026 quarter, anticipating improvements in production, order books, capacity utilisation and exports. The Business Expectations Index (BEI), another composite indicator used to assess business sentiment, also improved, reflecting greater confidence in the sector’s near-term outlook.

However, rising raw material expenses continue to weigh on manufacturers. While demand conditions and business sentiment strengthened, companies reported persistent cost pressures and more moderate sentiment regarding selling prices. These factors could affect profitability if businesses are unable to pass on higher production costs to customers.

The survey also indicates that positive demand conditions are expected to continue into Q4FY27 and Q1FY28. Manufacturers anticipate further improvements in production, order books and capacity utilisation over these quarters, while input cost pressures are expected to remain elevated. Companies may respond by increasing selling prices to offset higher expenses, potentially affecting their margins and pricing strategies.

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The RBI released the findings from the 115th round of its quarterly Industrial Outlook Survey, which assessed manufacturing business conditions during Q2FY27 and gathered expectations for the following three quarters. Conducted between July and September 2026, the survey covered 1,224 manufacturing companies.

The findings point to a cautiously positive outlook for India’s manufacturing sector, with improving demand expectations balanced by continuing concerns over raw material costs, selling prices and profitability.