The HSBC India Manufacturing Purchasing Managers' Index (PMI), a measure of factory production, stood at 51.3 in March, down from 52.5 in the previous month, signalling a "slight and weaker" improvement of business conditions across the country's goods producing sector.
Activity in the sector expanded for the fifth consecutive month in March. A PMI reading above 50 indicates growth while a lower reading means contraction.
"The momentum in the manufacturing sector eased on the back of a slowdown in order flows and raw material shortages," HSBC Chief Economist for India and ASEAN Leif Eskesen said.
According to HSBC, the survey participants commented on higher underlying demand, but indicated that increased competition for new work and the elections weighed on growth.
Meanwhile, export orders increased at the strongest pace in almost three years in March on the back of improved demand conditions in key markets, HSBC said.
On price rise, the report said inflationary pressures eased in March. Input costs rose at the weakest rate in nine months and output prices increased at the slowest pace since last June.
"Growth is likely to remain moderate in coming months as fiscal tightening, relatively high corporate leverage, and rising non-performing loans in the banking system pose headwinds to growth," Eskesen said.
India's economic growth slowed to 4.5 per cent in 2012-13 due to the global slowdown and domestic factors such as high interest rates.
The growth rate during April-September of 2013-14 slipped to 4.6 per cent from 5.3 per cent in the same period in the previous financial year.
"While we might see traction on economic reform and execution of investment projects after the upcoming elections, the recovery in growth is likely to prove protracted," Eskesen added.
RBI Monetary Policy Review - HIGHLIGHTS
Following are the highlights of RBI monetary policy review:
* Short-term lending (Repo) rate unchanged at 8 pc.
* Cash reserve ratio (CRR) too unchanged at 4 pc.
* No rate hike if inflation continues to trend lower.
* Economic growth for 2014-15 expected at 5.5 pc.
* CAD expected to come down to 2 pc of GDP in 2014-15.
* Retail inflation expected to be under 6 pc in 2014.
* RBI asks banks not to charge penalty for failure to maintain minimum balance in inoperative account.
* Approval of new bank licences after consulting EC.
* RBI open to banking mergers, provided competition and stability are not compromised.
* Industrial activity continues to be a drag on economy.
* RBI will strive to increase reach of financial services to everyone by using technology and new products.
* Stress on priority sector lending for greater financial access.
* Today's was first bi-monthly monetary policy review, next one scheduled for June 3.
Indian factory output eased in March: HSBC Manufacturing PMI
(Reuters) Indian manufacturing output grew at a slower pace in March as weaker domestic demand dragged on output growth, a business survey showed on Tuesday.
The HSBC Manufacturing Purchasing Managers' Index (PMI) , which gauges business activity in Indian factories but not its utilities, fell to 51.3 in March after surging to a one-year high of 52.5 in February.
Foreign orders came in at their fastest pace in almost three years but the overall new orders index - which measures both domestic and foreign demand - fell to 52.7 in March from 54.9.
That pushed the output index down to its lowest level this year, although at 52.2 it was still comfortably above the 50 mark that divides growth from contraction.
"The momentum in the manufacturing sector eased on the back of a slowdown in order flows and raw material shortages. Meanwhile, inflation also moderated,", said Leif Eskesen, chief economist for India & ASEAN at HSBC.
The survey showed input and output prices rose at their slowest pace in nine months, suggesting inflation will ease further in the coming months after cooling in February.
Wholesale inflation came in lower than expected in February as food and fuel prices moderated, while consumer price inflation eased for the third straight month to a 25-month low, official data showed.
This means the Reserve Bank of India likely will leave interest rates unchanged at its meeting later on Tuesday, a Reuters poll conducted last week predicted.
High borrowing costs, stubbornly high inflation and the government's inability to push through key reforms have hurt growth in Asia's third-largest economy, which slowed to a near decade-low of 4.9 percent in the December quarter.
But investors' confidence has revived in recent weeks as this month's general election is expected to usher in a new government led by the opposition Bharatiya Janata Party, which is widely perceived to be more business-friendly.