The manufacturing sector lost steam last month with marked declines in output, indicating taut monetary conditions may be taking hold even as prices remained at elevated levels, a survey showed.
The HSBC Market Purchasing Managers' Index, based on a survey of around 500 companies, showed a sharp fall to 55.3 in June from 57.5 in May, its lowest level since September last year and the steepest monthly fall since November 2008.
The June reading marked the 27th consecutive month that the key index of manufacturing in Asia's third largest economy has been above the 50 mark that divides growth from contraction.
"Even with growth easing, tight capacity is still showing up in rising backlogs of work and a lengthening in supplier delivery times," said Leif Eskesen, chief economist for India and ASEAN at HSBC.
"On the inflation front, input costs accelerated, while output prices rose less fast."
All but one sub-index saw a fall with the index for output seeing the biggest plunge to 58.4 from the previous reading of 63.2. This was a reflection of a weaker growth in new orders coupled with labour and power shortages.
With prospects of growth in the rich-world's economy looking somewhat shaky after a flurry of weak data over the last few months and Greece's debt crisis showing few signs of easing, Asian economies, though faring better, have their own set of problems.
Policymakers in China and India are desperately trying to reign in rampant inflation via rapid interest rate hikes. The Reserve Bank of India (RBI) raised rates for the 10th time in just over a year last month and signalled more such rate hikes were to come even as the economic growth was slowing down.
But prices show little signs of easing with the input price index the only one to rise last month. Output price growth slowed marginally but the index remained at elevated levels as manufacturers tried to keep up with the high cost of raw materials.
Fuel inflation hit an eight week high of 12.98 % in mid June, even before the government's recent increase in diesel prices, putting further pressure on headline inflation.
"These numbers confirm that tight capacity and monetary tightening is constraining growth. However, inflation pressures are still firmly in place, calling for further policy rate hikes to anchor inflation expectations," Eskesen said.
The tightrope act between curbing soaring inflation and maintaining growth is proving to be tricky with the latest industrial output figures also showing signs of weakness, possibly leading the central bank to reconsider its aggressive pace of policy tightening.
April's annual 6.3 % expansion in production at factories, mines and utilities compares with 8.8 % in March and was the slowest in three months.