India's manufacturing sector growth jumped to 17-month high in July, driven by "flood of new orders" from both domestic and overseas companies on the back of post-election boost to sentiments, an HSBC survey said.
The HSBC India Manufacturing Purchasing Managers' Index (PMI), a measure of factory production, rose to 53.0 in July, up from 51.5 in June, signalling a solid improvement in business conditions. A PMI reading above 50 indicates growth while a lower reading means contraction.
Business conditions in the Indian manufacturing sector improved for the ninth consecutive month in July, as companies scaled up production in response to robust levels of demand.
"A flood of new orders from both domestic and external sources has led to a surge in activity, pushing the manufacturing PMI to a 17-month high," HSBC Co-Head of Asian Economic Research, Frederic Neumann said, adding that all monitored categories witnessed a rise in output and order flows.
Striking a quick word of caution, HSBC said input price pressures have risen sharply and supply side constraints still limit the pace with which growth can recover without stoking inflation.
"The speed of the recovery has also lifted price pressures, with input prices rising steeply. This means that the RBI may not cheer as loudly as the rest of us," Neumann said.
The report added that rains have progressively improved, reducing the severity of the drought, and the new government has been proactive in addressing potential price risks.
"These two factors provide the RBI with enough comfort to stay on hold next week. But, the battle against inflation is not over, price indicators within the PMI serve as a reminder of this fact.
The speed of the growth recovery needs to be monitored, if it is too quick it could be inflationary," HSBC said. RBI's next credit policy review is scheduled on August 5.
According to official figures, retail inflation in June touched its lowest mark at 7.31 per cent since January 2012 and wholesale price-based index slid to four-month low of 5.43 per cent, mainly because of easing vegetables prices.