The seasonally adjusted Purchasing Managers' Index (PMI) fell to 56.6 in December from 58.9 in November as the strong momentum of previous months slackened due to slower domestic and external demand.

The PMI, compiled by British-based NTC research and sponsored by ABN AMRO Bank, tracks changes in manufacturing business conditions by polling 500 companies each month on output, orders, employment and prices.

PMI readings above 50.0 signal an improvement in business conditions while readings below 50.0 show a deterioration.

In October, the index showed manufacturing expanding at its fastest pace since the survey was introduced in April 2005.

India's economy grew an annual 9.1 percent in the first half of the fiscal year that ends in March, and the Reserve Bank of India (RBI) has been raising interest rates throughout the year to keep price pressures in check.

Last month, it announced an increase in the amount of funds banks have to keep on deposit at the central bank.

The PMI output index fell to its lowest in five months at 59.5 in December from 63.9 in November, while new orders dropped to 61.7 from 65.5 in November as the pace of exports cooled.

The export order index fell to 54.1 in December from 58.4 in the previous month, while backlogs of work rose at their weakest pace since April.

SOFTER INFLATION

The survey showed input price inflation had softened. The seasonally adjusted input price index fell to 55.1 in December from 58.9 in the previous month.

"The sharp fall in the rate of average input cost inflation for firms in December is encouraging and reflects the impact of moderation in global commodity prices, particularly oil," said Abheek Barua, chief economist, India, at ABN AMRO Bank.

The output price index fell to 51.9 in December from 52.1, signalling a moderating rate of factory gate price inflation.

India's annual inflation rate, based on wholesale prices, is running above 5 percent and is forecast to top 6 percent in early January, beyond the central bank's 5.0-5.5 percent range for the end of the fiscal year in March 2007.