Aug-26 IIP: Strong momentum continues

India’s industrial production growth accelerated to 8.0% YoY in Aug-26, from 7.4% in Jul-26 (revised up from 6.7% reported earlier), marking the third consecutive month of robust growth. The outcome exceeded market expectations that were pegged around 7%. The IIP print adds to the spate of high-frequency indicators pointing to economic activity maintaining momentum well into Q2 FY27.

Key internal highlights of Aug-26 data 

• On a sequential basis, the IIP contracted by 1.8% MoM, lower than the average contraction of 0.11% recorded over the last 3 years in August.
• Sectoral classification (annualized comparison): 
• The upside was led by Electricity & Gas Supply (12.3%, a 27-month high) and the heavyweight Manufacturing (9.0%) sector.
• In comparison, growth in Water Supply, Sewerage & Waste Management eased marginally to 6.3% while the Mining & Quarrying segment continued to post a dismal performance, recording a series low of -5.6%. Notably, mining activity has contracted on an annualized basis in 7 of the last 8 months.
• Within Manufacturing, 18 out of 23 sub-sectors recorded positive growth, of which 10 posted a double-digit expansion. The top 3 performing sub-sectors were Electrical equipment (30.9%), Other transport equipment (25.3%) and Motor vehicles, trailers and semi-trailers (25.2%).
• Of the 5 sub-sectors which recorded negative growth, the key weak spots were Tobacco (-8.0%) and Wearing apparel (-7.4%).

• Use-based classification (annualized comparison): 
• Growth remained robust across most categories, with Capital goods, Intermediate goods and Consumer durables all clocking double-digit expansion.
• Primary goods moderated to a 3-month low of 3.5%. Consumer non-durables improved to 2.1% from -0.8% in Jul-26, but the underlying trend remains subdued – FYTD27 growth for the category stands at just 1.2%, against 9.4% for Consumer durables.
• The use-based classification of IIP continues to underscore the strength in investment-oriented sectors, alongside a persistent performance gap between Consumer durables and Non-durables. 

Inference and Outlook: 

Despite renewed pressure on global maritime activity and energy prices, India’s industrial activity has belied slowdown concerns. The resilience in IIP growth in Aug-26 is broadly in sync with most high-frequency indicators of economic activity, which have maintained momentum well into Q2 FY27.

Four factors have helped insulate India’s industrial activity –

• Continued emphasis on public capex: general government capex disbursal expanded at a robust pace of ~24% YoY during Apr-Jul FY27, on top of ~28% growth in the corresponding period of FY26. This has been supportive of Capital goods and Infrastructure & construction goods.
• With India’s US tariff disadvantage ending towards the end of FY26, merchandise export growth picked up sharply to 17.9% YoY during Apr-Aug FY27 from 2.0% a year ago, supporting Manufacturing and Intermediate goods.
• The structural GST rationalization in Sep-25 provided an impetus to private consumption, with Consumer durables emerging as the prime beneficiary.
• Cyclical policy support from the MPC’s cumulative 125 bps repo rate cut between Feb-25 and Dec-25, along with regulatory easing of credit conditions, provided an overall supportive environment for industrial activity.

That said, the encouraging IIP performance so far in the fiscal year could face risks, especially in H2 FY27.

• Monsoon: The 2026 southwest monsoon has recorded a cumulative deficit of 12% (Jun 1 to Sep 28), worse than IMD’s forecast of a 10% deficiency, accompanied by an extremely uneven distribution. Kharif sowing acreage has contracted by 1.2% YoY. In addition, the high probability of a Super El Nino during the upcoming rabi season could further weigh on farm output and rural incomes in FY27.
• Geopolitics and trade: The Middle East crisis appears to be in a stalemate, with renewed pressure on maritime activity and energy prices (India Crude Basket has averaged USD 116 pb in Sep-26 so far, higher than the average price of USD 110 pb during Apr-May 2026). Further, under the Lindsey O. Graham Sanctioning Russia and Iran Act of 2026 (passed on Sep 18^th), the US Congress has granted the President full authority to impose tariffs of up to 100% on major buyers of Russian energy, placing India at significant risk. Ongoing diplomatic and trade negotiations could, however, help secure a waiver.
• Inflation and monetary tightening: The combination of weather and war-related adverse factors, along with firmer food (led by sugar, oilseeds and pulses) and fuel prices, has tilted the balance of risk for inflation to the upside. We expect the RBI to deliver a cumulative 50 bps rate hike over Dec-26 and Feb-27, although the risk of an earlier move in Oct-26, or a larger dose of tightening, cannot be ruled out.
• Fading tailwinds: Statistically, the impact of GST rationalization will drop off the base from Sep-Oct 2026, while the pass-through of higher commodity prices could erode purchasing power. The festive season and government transfers could provide a near-term buffer, but these impulses are unlikely to be durable.

Overall, we expect industrial production growth to remain investment-led, although growth is likely to moderate through H2 FY27 on renewed macro headwinds. We remain optimistic about exports, given the FTAs signed over the last year, ongoing efforts towards market diversification and an undervalued currency (on a REER basis, we estimate the INR to be ~6% undervalued in Jul-26). Meanwhile, sustained public capex and targeted MSME support should cushion the slowdown, while elevated input costs and geopolitical disruptions remain key headwinds. The strength in Aug-26 IIP, along with the positive surprise in the Q1 FY27 GDP print, reinforces our upwardly revised FY27 GDP growth forecast of 6.9%.

Table 1: Annualized growth in IIP and its key components

Chart 1: India’s industrial production has shown strong momentum in recent months