Factory activity shrinks in August for first time in 4-1/2 years

Indian factory activity shrank for the first time in more than four years last month, adding to the country's deepening economic malaise even as the Reserve Bank of India (RBI) struggles to defend the battered rupee currency, a survey showed.

The bleak Purchasing Managers' Index (PMI) comes hard on the heels of data on Friday that showed Asia's third-largest economy grew at it slowest quarterly rate in the three months to June since the global financial crisis, suggesting more pain ahead.

The HSBC Manufacturing PMI, compiled by Markit, sank to 48.5 in August from 50.1 in July, the lowest reading since March 2009. Economists polled by Reuters had expected a far shallower fall to 49.9.

The index, which gauges business activity in Indian factories but not utilities, had been close to the 50 mark that separates growth from contraction since May but falling orders dragged it under last month.

"Manufacturing activity contracted in August for the first time since March 2009. This was led by a decline in new orders, especially export orders," said Leif Eskesen, chief economist for India at survey sponsor HSBC.

The survey showed new export orders shrank for the first time in a year.

In a sign that domestic demand is also faltering, new orders, which include domestic orders, shrank at a faster pace. The index fell for the sixth straight month to 47.5 in August, its lowest since February 2009.

That prompted factories to cut production, with the sub-index measuring output falling to its lowest since early 2009.

Data on Friday showed the Indian economy grew 4.4 per cent in the April-June quarter, the slowest quarterly rate since Jan-March of 2009,

hurt by a contraction in mining and manufacturing.

Indian economic growth has nearly halved in the last two years to a decade-low rate of 5 percent in the fiscal year that ended in March, and a majority of the economists surveyed by Reuters last week expect this year to be worse.

Weighed down by a record current account deficit, the Indian rupee has lost around a fifth of its value since the U.S. Federal Reserve hinted in May it was going to start paring back its stimulus, sparking capital outflows from many emerging markets.

The beleaguered rupee suffered its worst month ever in August, hitting successive record lows, leaving the Reserve Bank of India few options to support the economy.

The RBI's main defence of the rupee has rested on draining cash from domestic money markets and raising short-term interest rates, making loans to struggling businesses costlier and adding to growth concerns.

"The RBI will likely keep its liquidity tightening measures in place for a while still to help contain the depreciation of the currency," Eskesen added.

"Combined with the heightened macroeconomic uncertainty, this will continue to weigh on growth in coming months."

Raghuram Rajan, former chief economist at the International Monetary Fund, is set to take over as governor of the Reserve Bank of India this week. Economists in a separate Reuters poll said his immediate focus will be to bolster the currency.