India’s manufacturing sector showed renewed strength in May, with factory activity accelerating to a three-month high as domestic demand remained robust despite mounting cost pressures. The HSBC India Manufacturing Purchasing Managers' Index (PMI), compiled by S&P Global, rose to 55.0 in May from 54.7 in April, surpassing the earlier flash estimate of 54.3. A reading above 50 indicates expansion in manufacturing activity.

The latest data points to a manufacturing sector that continues to outperform many global peers at a time when industrial activity across several major economies remains uneven. Demand conditions remained healthy during the month, with new orders expanding at the fastest pace since February.

Production levels also improved as companies responded to stronger order inflows and maintained inventory-building activity. According to the survey, manufacturers continued to report solid domestic demand, which remained the primary growth driver.

The improvement comes after several months of mixed manufacturing signals. Earlier PMI readings had indicated that industrial activity was facing pressure from softer demand trends, geopolitical uncertainties and rising raw material costs. However, the May data suggests that underlying domestic consumption and business activity continue to provide a cushion against external volatility.

A notable feature of the latest survey was the sharp increase in input cost inflation. Manufacturers reported some of the strongest cost pressures seen in nearly four years, reflecting higher prices for energy, fuel, metals and other key industrial inputs. While firms continued to expand production, the rise in costs presents a challenge for operating margins, particularly for companies with limited pricing power.

The divergence between strong demand and rising costs is becoming an increasingly important theme for Indian industry. Many companies appear to be absorbing a portion of higher expenses rather than passing them fully to customers, indicating concerns that aggressive price hikes could weaken demand momentum. This trend may keep pressure on profitability in sectors where competition remains intense.