Indian factories in June stepped up production and hired workers at the fastest rate in more than two years, but sagging demand abroad took a toll on growth in new export orders, a survey showed on Monday.
The HSBC manufacturing Purchasing Managers' Index (PMI) rose to 55.0 in June, a four-month high, from 5 4.8 in May. It has kept above the 50 mark that divides growth and contraction for more than three years.
Still, the survey raised some concerns. High prices continue to weigh on manufacturers, with both input and output costs rising sharply from May. That underscored expectations the central bank is unlikely to cut key interest rates soon.
Asia's third-largest economy is grappling with slowing economic growth but high inflation at a time when the health of the global economy is deteriorating. A slump in factory activity in China and Japan deepened in June.
"Activity in the manufacturing sector kept up the pace in June with output and employment expanding at a faster pace," said Leif Eskesen, economist at HSBC. The employment sub-index was at 52.4 in June, the highest level since May 2010.
While the PMI suggested domestic demand was holding up, signs from abroad looked more ominous.
New export orders grew at their slowest pace since November 2011, with demand weakening in top trading partners Europe and the United States.
"New order growth decelerated slightly led by export orders while stock levels rose, suggesting a slight moderation in output growth going ahead," HSBC's Eskesen said.
Meagre first quarter growth and low consumer confidence in the United States, along with equally dismal sentiment data coming out of the euro zone in the past week, do not bode well for India's factories in the months ahead.
Although euro zone leaders agreed to take emergency action to bring down Italy's and Spain's spiralling borrowing costs at a summit on Friday, it remains to be seen if investor relief can be sustained.
India's benchmark stock index, the BSE Sensex jumped to a two-month high on Friday, reflecting a rally across Asian shares after the European Union summit. Meanwhile, the Indian economy has to deal with its own woes.
Growth slumped to its lowest in nine years in the quarter to March due to a slowdown in manufacturing, inflation picked up in May after showing signs of cooling in April and the rupee recently tumbled to a record low versus the dollar.
The survey showed little sign of price pressures easing. Factory input and output price indexes hit their highest levels since August 2011 and March 2011, respectively.
"In light of these numbers, the Reserve Bank of India does not have a strong case for further rate cuts, which could add to lingering inflation risks," HSBC's Eskesen said.
At its June 18 meeting, the central bank defied widespread calls to cut interest rates and boost growth, instead choosing to leave rates on hold, and put the onus on the government to pull the economy out of its slump.
Only last Wednesday, India's biggest commercial vehicle maker, Tata Motors, said it would halt production at one of its factories for three days last week in yet another sign of slowing growth.