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India manufacturing output hits 3-month high

Indian manufacturing orders hit a three-month high in May, suggesting stronger output in the coming months, as overall factory output growth picked up pace slightly.

NEW DELHI: Indian manufacturing orders hit a three-month high in May, according to a business survey on Monday that also flagged stubborn inflation risks on the eve of a key monetary policy-setting meeting.

The HSBC Purchasing Managers' Index (PMI) survey, keenly watched as a portent of industrial expansion and overall economic health, comes as India looks to new Prime Minister Narendra Modi to engineer a growth rebound in Asia's third-largest economy.

"The momentum in the manufacturing sector improved at the margin, thanks to higher domestic and export order flows," said Frederic Neumann, HSBC co-head of Asian economics

The PMI showed new orders, an important forward-looking indicator, jumped a full point to 53.2 from 52.5 in April while overall manufacturing output edged up to 51.4 in May from 51.3 the previous month, the seventh straight monthly rise.

A reading of over 50 points indicates expansion, below 50 a contraction.

The survey propelled the Bombay Stock Exchange's benchmark index nearly two percent higher to a three-week peak of 24,684.85 points.

But the HSBC survey also highlighted inflation worries.

While factory input price pressures eased, it showed output prices rising, meaning the central bank cannot lower its inflation guard when it holds its first policy-setting meeting on Tuesday since Modi took office, economists said.

Government data Friday showed the economy stuck in low gear, growing by 4.7 per cent year-on-year in the 12 months to March 2014 -- the second consecutive year of sub-five percent expansion.

Analysts said the data was a reminder of the stark challenges facing the new pro-business government.

"The election was clearly a game-changer. Still, it's important to remain realistic about how quickly things will improve," Neumann said, adding even if "the low point may be past us, recovery will likely prove only gradual".

India's PMI figures were more downbeat than HSBC's China PMI released on Sunday. These showed factory activity expanded in May at the fastest rate in five months, stoking hopes the world's second-largest economy is regaining traction.

Industry has been clamouring for India's central bank to cut interest rates from an 18-month high of eight per cent to spur growth that is around half the level of that during the country's boom years.

But with consumer inflation near double-digits, the hawkish central bank was expected Tuesday to leave its benchmark lending rate unchanged.

The ruling Bharatiya Janata Party, which in opposition also demanded lower rates, appeared to be toning down its stance.

"We must move towards an era of fiscal discipline where we can reduce the fiscal deficit, contain inflation and improve our growth rates," Finance Minister Arun Jaitley said in a Facebook post.

There are also forecasts that the monsoon, India's crop lifeline, may be weak which could further fuel food price rises.

The Association of Chambers of Commerce and Industry of India said the central bank might cut rates by a "symbolic" 25-basis points but economists disagreed.

"I strongly feel the central bank will hold rates steady," said Bank of Baroda chief economist Rupa Rege Nitsure.

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