The HSBC India Manufacturing Purchasing Managers' Index (PMI), a measure of factory production, rose marginally from 51.4 in May to 51.5 in June as operating conditions improved for the eighth month in succession.
A PMI reading above 50 indicates growth while a lower reading means contraction.
"Things are gradually improving in India's manufacturing sector. Output picked up in June, supported by growing order flows, especially from overseas," HSBC Co-Head of Asian Economic Research, Frederic Neumann, said.
Growth in the Indian manufacturing economy was maintained in June. Greater domestic and foreign demand led companies to increase production levels further, HSBC said.
June data highlighted a marked and accelerated expansion of new export orders, which hit a three month high during the month.
On price rise, the report said higher rates paid for metals, plastics, textiles, food and energy led to a further increase in average purchase prices. This rise in input costs was passed on to clients, as highlighted by a rise in output prices.
"The muted pace (of manufacturing activity) will suit the RBI: since input and output prices are rising as well, faster growth would only stoke inflation and require tightening," Neumann said.
RBI had increased the key policy rate, repo, three times since Raghuram Rajan took over as the Governor in September.
The Reserve Bank of India last month kept key interest rate unchanged at 8 per cent. However, it cut the amount of deposits banks need to park in government securities by 0.5 per cent to 22.5 per cent to improve availability of funds.
Meanwhile, for the ninth consecutive month, manufacturing employment rose in June. Those panelists reporting higher payroll numbers attributed this to the signing of new contracts.
Indian June factory activity accelerates at fastest pace in 4 months
(Reuters) Indian factory activity expanded in June at its quickest pace since February while output prices rose at the fastest rate in eight months, signaling a further rise in inflation that is bound to vex the central bank, a business survey showed on Tuesday.
The HSBC Manufacturing Purchasing Managers' Index (PMI), compiled by Markit, advanced to 51.5 in June from 51.4 in May. A figure above 50 indicates expansion.
A jump in new export orders pushed the output sub-index to 52.4 from 51.7 in the previous two months.
"Things are gradually improving in India's manufacturing sector. Output picked up in June, supported by growing order flows, especially from overseas," said Frederic Neumann, co-head of Asian economic research at HSBC.
But domestic demand remained weak, hurting jobs growth.
"The muted pace will suit the RBI: since input and output prices are rising as well, faster growth would only stoke inflation and require tightening," added Neumann.
The survey showed firms passed on a greater cost burden to consumers. Prices charged rose at their fastest pace since October.
After May wholesale price inflation hit a five-month high any further move up would put pressure on the Reserve Bank of India to leave interest rates on hold for longer or even to raise them.