The sources provide a comprehensive overview of the results of the 111th round of the Reserve Bank of India’s (RBI) quarterly Industrial Outlook Survey (IOS) of the Manufacturing Sector. This survey encapsulates the qualitative assessment of the business climate by Indian manufacturing companies.
Survey Scope and Methodology
- Survey Coverage and Timing: The 111th round of the survey was conducted during July-September 2025. It focused on two main timeframes:
- The qualitative assessment of the business climate for Q2:2025-26.
- The expectations for Q3:2025-26.
- Longer Outlook: The survey also gathered the outlook on select parameters for the subsequent two quarters, Q4:2025-26 and Q1:2026-27.
- Participants: A total of 1,106 companies responded in this round of the survey.
- Disclaimer: The survey results reflect the views of the respondents and are not necessarily shared by the Reserve Bank.
- Measurement Indices (BAI and BEI): Two summary indices are computed to give a snapshot of the business outlook in every quarter: the Business Assessment Index (BAI) (based on assessment) and the Business Expectations Index (BEI) (based on expectations).
- These indices are composite indicators calculated as a simple average of nine weighted business parameters.
- The nine parameters considered are: overall business situation, production, order books, inventory of raw material, inventory of finished goods, profit margins, employment, exports, and capacity utilisation.
- The indices range from 0 to 200, with 100 being the threshold separating expansion from contraction.
Key Findings for Q2 and Q3: 2025-26
The sources detail specific qualitative assessments and expectations for the manufacturing sector:
A. Assessment for Q2:2025-26
- Business Sentiments (BAI): The Business Assessment Index (BAI) increased compared with Q1:2025-26, rising from 109.6 to 110.6.
- Demand Conditions: Manufacturers reported some moderation in demand conditions compared to the previous quarter. This moderation was reflected in their assessments of production, order books, and capacity utilisation.
- Cost and Pricing: Pressures from the cost of raw material, financing cost, and salary outgo were perceived to have eased. Correspondingly, sentiments regarding growth in selling prices and profit margins moderated.
B. Expectations for Q3:2025-26
- Business Sentiments (BEI): The Business Expectations Index (BEI) remained steady in Q3:2025-26, reflecting sustained sentiment among manufacturers, registering 126.3 (compared to 126.2 in Q2:2025-26).
- Demand Outlook: Manufacturers retained a positive outlook on demand conditions for Q3:2025-26, though some signs of moderation are expected.
- Cost and Pricing: Cost pressures from raw materials and salary outgo are expected to ease. However, growth in selling prices is likely to be higher.
C. Extended Outlook (Q4:2025-26 and Q1:2026-27)
Looking further ahead, manufacturers anticipate improved demand conditions in Q4:2025-26 and Q1:2026-27. They expect that while input cost pressures are likely to persist, they will have the pricing power to pass on higher costs through selling prices.
The assessment for the second quarter of the fiscal year (Q2:2025-26) forms a central part of the 111th round of the Reserve Bank of India’s (RBI) Industrial Outlook Survey (IOS), which was conducted during July-September 2025. The survey gathered the qualitative assessment of the business climate from 1,106 responding manufacturing companies.
Here is a detailed discussion of the Assessment for Q2:2025-26:
I. Overall Business Sentiment and Indices
The overall assessment of the business climate improved slightly during Q2:2025-26:
- Business Assessment Index (BAI): The BAI, which measures the qualitative assessment of business conditions (with 100 separating expansion from contraction), increased compared with the preceding quarter (Q1:2025-26). The BAI rose from 109.6 in Q1:2025-26 to 110.6 in Q2:2025-26.
- Overall Business Situation (Net Response): The net response regarding the overall business situation remained steady at 18.0% in Q2:2025-26, the same level recorded in Q1:2025-26.
II. Demand and Operational Conditions
Manufacturers generally indicated a moderation in demand conditions when compared to the assessment provided in the previous quarter. This easing was reflected across key operational parameters:
| Parameter | Q1:2025-26 Net Response | Q2:2025-26 Net Response | Observation |
|---|---|---|---|
| Production | 21.4% | 17.9% | Moderated. |
| Order Books | 19.9% | 14.8% | Moderated. |
| Capacity Utilisation | 16.0% | 14.2% | Moderated. |
| Exports | 10.9% | 10.0% | Slight decline in optimism. |
| Employment | 10.6% | 8.0% | Decline in positive sentiment. |
In terms of inventory management, conditions were assessed as slightly more favorable, as optimism is reflected by ‘Below average’ inventory levels:
- Inventory of Raw Materials: The net response improved (less stock assessed as above average) from 3.0% to 1.5%.
- Inventory of Finished Goods: The net response improved from 2.6% to 0.5%.
III. Cost, Pricing, and Profitability
A key finding for Q2:2025-26 was the easing of cost pressures, which, however, coincided with moderation in pricing power and a worsening in profit margins.
A. Cost Pressures (Perceived Easing)
Pressures from the cost of raw material, financing cost, and salary outgo were perceived to have eased during the quarter. Since 'Decrease' in cost is considered optimistic, less negative net responses signify easing pressure:
- Cost of Raw Material: The net response improved substantially from -46.6% in Q1:2025-26 to -38.1% in Q2:2025-26.
- Salary/Other Remuneration: Cost pressure eased significantly, moving from a net response of -27.1% to -12.7%.
- Cost of Finance: This pressure also eased, assessed at a net response of -7.2% in Q1:2025-26, improving to -6.1% in Q2:2025-26.
B. Pricing and Profit Margins
Sentiments regarding both selling price growth and profit margins moderated:
- Selling Price: The net response decreased sharply from 6.8% (Q1:2025-26) to 2.4% (Q2:2025-26). This indicates that a smaller share of manufacturers successfully assessed an increase in selling prices.
- Profit Margin: Sentiments worsened, shifting from a net response of -5.0% to -6.4%. This suggests that despite easing input costs, more manufacturers assessed a decrease in profit margins during Q2:2025-26.
IV. Financial Situation
Assessment of the overall financial health and availability of funds declined:
- Overall Financial Situation: The net response regarding a 'Better' overall financial situation dropped from 21.0% to 17.5%.
- Availability of Finance (Internal Accruals): The positive net response decreased from 20.1% to 15.7%.
- Availability of Finance (Banks & Other Sources): The positive net response decreased from 16.4% to 11.5%.
In essence, while the Business Assessment Index (BAI) registered a modest increase, suggesting overall continued expansion, the Q2:2025-26 assessment was characterized by a softer demand environment (moderation in production and orders) and easing input cost pressures, yet manufacturers still faced moderation in pricing power which led to slightly worse profit margin assessments.
The assessment for Q2:2025-26, reflecting a slowdown in demand indicators alongside easing costs, can be seen as the manufacturing sector navigating headwinds while maintaining momentum. If business expansion were a vehicle, Q2:2025-26 was assessed as a period where the accelerator (demand) was eased slightly, but the drag (input costs) was also reduced, allowing the sector to coast forward steadily, even as profitability became a bit tougher to maintain.
The Expectations for Q3:2025-26 were surveyed as part of the 111th round of the RBIThe Expectations for Q3:2025-26 were surveyed as part of the 111th round of the RBI Industrial Outlook Survey (IOS), conducted during July-September 2025, capturing the forward-looking sentiment of 1,106 manufacturing companies. The data indicates that manufacturers maintained a sustained, positive outlook, albeit with some anticipated moderation in certain areas compared to the previous expectations.
I. Overall Business Sentiment (BEI)
The overall expected business climate for Q3:2025-26 remained stable and highly optimistic:
- Business Expectations Index (BEI): The BEI, which ranges from 0 to 200 (with 100 being the expansion threshold), remained steady at 126.3 in Q3:2025-26, reflecting sustained positive sentiment among manufacturers. This figure is marginally higher than the 126.2 recorded for Q2:2025-26 expectations (as reported in the previous round).
- Overall Business Situation: The net response for the overall business situation shows continued optimism, although it dropped slightly from 51.5% (previous expectations for Q2:2025-26) to 49.3% for Q3:2025-26.
II. Demand and Operational Outlook
Manufacturers retained a positive outlook on demand conditions for Q3:2025-26, though the net response figures suggest some signs of moderation compared to the expectations for Q2:2025-26 (based on the previous round).
| Parameter | Previous Expectation for Q2:2025-26 (Net Response) | Expectation for Q3:2025-26 (Net Response) | Observation |
|---|---|---|---|
| Production | 53.3% | 47.9% | Positive, but decreased optimism. |
| Order Books | 52.1% | 45.7% | Positive, but decreased optimism. |
| Capacity Utilisation | 43.8% | 43.3% | Steady optimism. |
| Exports | 34.7% | 37.7% | Increased optimism. |
| Employment | 23.7% | 25.2% | Increased optimism. |
Inventory levels are expected to be below average (which is considered an optimistic sign, indicating strong inventory drawdown or sales):
- The negative net responses for Raw Material Inventory (-15.5%) and Finished Goods Inventory (-15.7%) deepened in Q3:2025-26, indicating manufacturers anticipate lower-than-average stock levels compared to previous expectations (Q2:2025-26: -12.1% and -12.5%, respectively).
III. Cost, Pricing, and Profitability Outlook
Manufacturers anticipate that the cost environment will ease, while expecting to achieve higher selling prices, leading to improved profit margins.
A. Cost Pressures (Expected to Ease)
Cost pressures from raw materials and salary outgo are expected to ease. In the context of the survey, a more negative net response indicates greater optimism (fewer firms expecting an increase in cost):
- Cost of Raw Material: The negative net response deepened slightly from -54.9% (previous expectation for Q2:2025-26) to -45.6% for Q3:2025-26, indicating continued easing pressure.
- Salary/Other Remuneration: The negative net response of -31.6% (previous expectation for Q2:2025-26) eased slightly to -29.9% for Q3:2025-26, suggesting continued relief from salary costs.
- Cost of Finance: The expectation for the cost of finance shows significantly intensified optimism (greater expectation of decrease in cost or fewer expectations of increase), moving from -12.5% to -27.9%.
B. Pricing and Profit Margins (Expected to Improve)
Unlike the actual assessment for Q2:2025-26 where margins moderated, manufacturers are highly optimistic about pricing and profitability in Q3:2025-26:
- Selling Price: Growth in selling prices is likely to be higher. The net response rose marginally from 23.8% (previous expectation for Q2:2025-26) to 24.1% for Q3:2025-26.
- Profit Margin: Optimism regarding profit margins sharply increased, with the net response jumping from 20.1% (previous expectation for Q2:2025-26) to 24.6% for Q3:2025-26. This suggests manufacturers expect their pricing power to outweigh the slightly moderating input costs.
IV. Financial Outlook
The expected financial situation remains robust, although slightly moderated compared to the previous round's expectations for Q2:2025-26:
- Overall Financial Situation: The net response dropped from 53.9% to 47.9%.
- Availability of Finance (Internal Accruals): Optimism decreased from 46.5% to 39.3%.
- Availability of Finance (Banks & Other Sources): Optimism decreased from 40.7% to 34.8%.
In summary, the expectations for Q3:2025-26 indicate a sustained positive business outlook (BEI 126.3). While expectations regarding core domestic demand (Production, Order Books) moderated slightly compared to the previous round's expectations, manufacturers anticipate stronger exports and hiring. Crucially, they expect cost pressures to ease and their pricing power to strengthen, leading to a noticeable improvement in profit margin outlook.
The 111th round of the Reserve Bank of India’s Industrial Outlook Survey (IOS) not only collected the assessment for Q2:2025-26 and expectations for Q3:2025-26 but also gathered the Extended Outlook on select parameters for the subsequent two quarters: Q4:2025-26 and Q1:2026-27.
This extended outlook suggests that manufacturers anticipate a gradual strengthening of key indicators beyond the immediate next quarter (Q3:2025-26), particularly concerning demand conditions and pricing power.
Key Findings on Extended Outlook (Q4:2025-26 and Q1:2026-27)
I. Demand and Overall Business Situation
Manufacturers generally anticipate improved demand conditions across Q4:2025-26 and Q1:2026-27. The optimism concerning the overall business situation and production shows an increasing trend across these extended quarters, surpassing the expectations reported for Q3:2025-26.
| Parameter | Expectation for Q3:2025-26 (Net Response) | Extended Outlook Q4:2025-26 (Net Response) | Extended Outlook Q1:2026-27 (Net Response) |
|---|---|---|---|
| Overall Business Situation | 49.3% | 53.2% | 55.1% |
| Production | 47.9% | 53.5% | 56.2% |
| Order Books | 45.7% | 51.8% | 53.6% |
| Capacity Utilisation | 43.3% | 50.5% | 49.6% |
| Employment | 25.2% | 31.3% | 32.4% |
This data shows manufacturers expect a clear acceleration in both production and order books in Q4:2025-26 and Q1:2026-27, with the net responses rising well above those anticipated for Q3:2025-26. Consequently, positive sentiment regarding employment also increases significantly in the extended period. The expectation for capacity utilisation also strengthens notably in Q4:2025-26 (50.5%) before moderating slightly in Q1:2026-27 (49.6%).
II. Cost Pressures and Pricing Power
Regarding costs and pricing, the key finding is that manufacturers expect persistent input cost pressures but anticipate having the ability to counteract them through increased selling prices.
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Input Cost Pressures: Input cost pressures (Cost of Raw Materials) are anticipated to persist. The net response, which is negative since 'decrease' in cost is considered optimistic, shows strong negative figures, indicating that a significant majority still anticipates rising raw material costs, although these pressures are slightly less intense than the Q3 expectation.
- Cost of Raw Materials (Net Response): Q3:2025-26: -45.6%; Q4:2025-26: -52.0%; Q1:2026-27: -49.9%.
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Selling Prices and Pricing Power: Manufacturers expect to have pricing power to pass on higher costs through selling prices. Expectations for increased selling prices rise sharply in the extended period:
- Selling Prices (Net Response): Q3:2025-26: 24.1%; Q4:2025-26: 31.3%; Q1:2026-27: 32.0%.
In summary, the Extended Outlook indicates that the optimism observed in Q3:2025-26 is expected to accelerate and solidify over the subsequent six months. Manufacturers foresee an environment of stronger demand (production, orders, employment) coupled with higher input costs, which they confidently expect to pass on to consumers via increased selling prices.
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