Economic Highlights

New Delhi, 3 August 2026

Factories Rise, Foreign Money Falls

NEW FACE OF INDIA’S RECOVERY

By Shivaji Sarkar 

Time to cheer, industrial output grows 7.3 per cent in June as against 2.2 per cent a year ago, said to be fastest in 22 months, with ‘strong expansion’ of manufacturing, electricity, gas supply and resilient domestic demand. Music to the ears amid the West Asia crisis, Trump tariff, issue of balance of trade and core sector growth reported in end of June. 

The favourable growth effect is said to have helped as well. Among the manufacturing sector 19 of 23 industries recorded growth in June. Sectors like motor vehicle trailers grew 17.5 per cent, textiles 18.7 per cent, beverages 12.5 per cent and food products 10.8 per cent. 

The IIP growth may not grow so fast in July. It is estimated to moderate to 5.4 per cent. Sustaining the pace is not easy with adverse base effect. Global growth is slowing. Is the sudden manufacturing growth a fluke? 

The core sector growth reports of June 22, 2026 say it grows at slowest in seven months, in May. It was not encouraging. It is being interpreted as lower growth on low base attributed to the decline in production from the petro-based sector – that supports wider products from paints, plastics, home appliances to roads as also rising costs and prices. 

India's 7.3 per cent industrial and 7.8 per cent manufacturing growth in June 2026 is not a complete fluke, but rather a reflection of genuine near-term momentum supported by robust investment demand and government capital expenditure, though analysts warn it faces headwinds from external risks and a low base effect. 

The data points to a rebound in industrial activity, but not necessarily to a broad-based acceleration in India's overall economic growth. 

Sustainability Uncertain

Industrial output strengthened in June 2026, led by manufacturing, which expanded 7.8 per cent, its fastest pace in nearly two years. Strong growth in capital goods (14.2 per cent) suggests continued investment in productive capacity, while robust gains in electrical equipment (34 per cent) and motor vehicles (17.5 per cent) indicate healthy demand in select industries. Electricity generation also surged 10.6 per cent, driven largely by exceptionally high summer temperatures. 

However, the impressive numbers require caution. Part of the rise reflects a favourable base effect, making year-on-year growth appear stronger than underlying momentum alone would suggest. 

Growth Uneven

India's recent growth remains driven largely by manufacturing and investment rather than broad consumer demand, while the surge in electricity output was partly weather-induced. The recovery faces risks from West Asia tensions, volatile crude oil prices, uneven monsoon rains, weaker rural demand and rising food inflation. Higher food and fuel costs could erode household purchasing power, slowing consumption—the largest contributor to India's GDP. 

The inflation is biting many industries. Among the latest with inflationary pressures, the Hindustan Unilever (HUL) decides to hike prices of its products.as its profits take a minor dip from a Rs 2768 crore in 2025 to Rs 2680 crore now and overall revenue rise of by 10 per cent to Rs 17,141 crore. 

As the consumers wonder why a small drop could not be absorbed by the company for detergents to soups after a 13-quarter high, the HUL says the market situation is volatile as its stock prices fall 7 per cent. 

Foreign portfolio investors have pulled over Rs 2.6 lakh crore ($27 billion+) from Indian equities since January 2026, driven by high local valuations, geopolitical conflicts, and rising US yields. Major indices like the Sensex and Nifty dippped significantly during the first half of the year. 

It is ascribed to high valuations, rising West Asia tensions pushing up crude oil prices, and global liquidity shifts toward higher US yields and AI-driven markets such as South Korea and Taiwan. As a result, foreign ownership of Indian equities fell to a 14-year low of 14.7 per cent. 

The Foreign Institutional Investor (FII) outflows have increased market volatility and pressured index heavyweights in sectors like banking and IT, but record Domestic Institutional Investor (DII) inflows have heavily absorbed the selling pressure. Domestic ownership has risen to roughly 19.2 per cent, surpassing FII ownership at 18.8 per cent for the first time. 

Shift to DII

However, domestic institutional investors (DIIs) offset much of the selling with record mutual fund inflows of over Rs 6.1 lakh crore, supported by steady retail SIP investments, making Indian markets increasingly resilient to foreign capital withdrawals. 

The DII inflows have remained strong, led by robust monthly systematic investment plan (SIP) contributions offsetting persistent foreign selling, while large-cap banking valuations trade near or below long-term historical averages despite healthy multi-year low asset stress. 

The DIIs invested over Rs 82,600 crore in May and Rs 85,800 crore in June 2026, supported by monthly SIP inflows of Rs30,000–31,000 crore. They accumulated banking, IT and consumer stocks amid FII selling. Large-cap banks continue to trade at attractive valuations despite record-low bad loans, with investor sentiment restrained by concerns over deposit growth, funding costs and narrowing interest margins.The data points to a structural shift in India's equity markets, not merely a temporary episode of foreign selling. 

The heavy FPI withdrawal in Indian equities since January 2026, reflect concerns over stretched valuations, geopolitical uncertainty in West Asia, higher crude oil prices, and the attractiveness of higher US bond yields and AI-led opportunities in markets such as South Korea and Taiwan. Consequently, foreign ownership has fallen to a 14-year low, underscoring a reassessment of India's risk-reward profile. 

However, the episode also marks a turning point. For the first time, domestic institutional ownership has overtaken foreign ownership, demonstrating the growing depth of India's capital markets. Record DII inflows—powered by sustained mutual fund investments and monthly SIP contributions of over Rs30,000 crore—have absorbed much of the foreign selling, preventing a sharper correction in the Sensex and Nifty. 

Banking, financials and IT bore the brunt of FII selling, yet domestic investors used the decline to accumulate quality stocks. Large-cap banks such as HDFC Bank, ICICI Bank, Axis Bank, and SBI trade at compelling price-to-earnings ratios, continue to trade at attractive valuations despite historically low non-performing assets, suggesting that current price weakness reflects near-term concerns over margins and funding costs rather than deterioration in fundamentals. 

The broader message is that India’s equity market is becoming less dependent on volatile foreign capital. Nevertheless, sustained FII outflows could still affect liquidity, valuations and corporate fundraising, especially if global interest rates remain elevated and geopolitical tensions persist. Domestic savings have strengthened market resilience, but they cannot fully insulate India from prolonged external financial shocks.---INFA 

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