The HSBC India Manufacturing Purchasing Managers' Index (PMI) - a measure of factory production - stood at 51.4 in January, up from 50.7 in December, the highest reading since March 2013.
India's manufacturing sector activity expanded for the third consecutive month in January. A PMI reading of above 50 differentiates growth from contraction.
"Manufacturing activity moved into higher gear led my faster growth in new orders," HSBC Chief Economist for India & ASEAN Leif Eskesen said.
According to HSBC, new orders expanded in January at the quickest rate in ten months, with stronger demand from both domestic as well as overseas clients.
Meanwhile, employment rate rose for the fourth straight month in January, with all three broad areas of the manufacturing segment creating jobs, HSBC said.
On the inflation front, the report said the average input costs rose in January. Consequently, companies also raised their output costs.
"...inflation pressures also firmed, suggesting that the RBI has to keep up its inflation guards," Eskesen said.
Reserve Bank Governor Raghuram Rajan raised the key policy rate by 0.25 per cent to 8 per cent in the third quarter review of monetary policy in a bid to curb inflation.
The central bank lowered its growth forecast for the current financial year to less than 5 per cent from its earlier forecast of 5 per cent and said inflation will continue to hover around 8 per cent by March-end.
Retail or CPI inflation in December moderated to a three-month low of 9.87 per cent, while the wholesale or WPI was at 5-month low of 6.16 per cent during the month.
India's manufacturing sector expands at strongest pace since March: HSBC
(Reuters): Indian factories started 2014 on a high note, with activity growing at its fastest pace in nearly a year as domestic and overseas orders increased, according to a survey that also showed inflation accelerated.
The HSBC Manufacturing Purchasing Managers' Index (PMI), compiled by Markit, bounced to 51.4 in January, its highest since March, from 50.7 in the previous month.
The index, which gauges business activity in Indian factories but not utilities, spent three months below the 50 mark that separates growth from contraction before rising above it in November.
"Manufacturing activity moved into higher gear led by faster growth in new orders," said Leif Eskesen, chief economist for India at survey sponsor HSBC.
A steady economic recovery in India's major export destinations of the United States and the euro zone over the past few months brought orders in at an increased pace.
After faltering late last year, the new orders sub-index rose to 52.4 last month from 51.3 in December while the pace of incoming export orders picked up for the second straight month.
That prompted firms to ramp up output last month.
The latest PMI reading may offer some relief for policymakers who have been struggling with stubbornly high inflation, government policy paralysis and fragile global demand, which put India in a rut of slowing growth.
But chances are that any respite might be short lived.
A sell-off in emerging markets in past weeks, driven by expectations of another reduction in the U.S. Federal Reserve's asset purchases, pushed central banks in Turkey, South Africa and India to raise key benchmark rates in surprise moves to ease pressure on their currencies and discourage capital flight.
The Reserve Bank of India unexpectedly hiked its repo rate 25 basis points last week to 8 percent to dampen inflation, but said the economy was now better prepared to deal with the risk of major capital outflows.
The PMI survey showed output prices grew at a faster pace last month while input cost pressures eased very slightly.
"Inflation pressures also firmed, suggesting that the RBI has to keep up its inflation guards," Eskesen said.
Consumer prices eased to a three-month low of 9.87 percent in December while the main inflation gauge, wholesale prices, slowed to 6.16 percent.