Factory PMI jumps to 8-month high in January
The HSBC manufacturing purchasing managers' index (PMI), compiled by Markit, jumped to 57.5 from 54.2 in December.
"Activity in the manufacturing sector rebounded again in January led by higher demand from both domestic and foreign clients, suggesting some recovery in sentiment in recent months," said Leif Eskesen, economist at HSBC.
India's headline PMI has held above the 50 level that separates growth from contraction for almost three years, underlining the sector's resilience in the face of a global downturn and euro area debt crisis.
India's factory output sub-index jumped to 62.9 in January from 55.8 in December, the biggest rise from one month to the next on record. Both the output and the new orders indexes rose to their highest level since May last year.
The figures suggest a startling pick up in a sector that has been battered by feeble growth in the United States and Europe and a prolonged spell of monetary policy tightening in India.
Industrial output expanded 5.9 percent in November from a year earlier, official data showed last month showed, beating all forecasts and swinging from a contraction of 4.7 percent in October.
Analysts have cut their forecasts for the economy and expect it to grow in the year to March at its slowest pace in two years. The economy grew 6.9 percent in the quarter ended September 2011.
After 13 rate rises to stamp out inflation in between March 2010 and October 2011, the central bank signalled last month it was shifting its focus to growth by cutting the cash reserve requirements for banks by 50 basis points.
The PMI suggests more strength lies ahead because new orders showed demand from both domestic and export clients. However, price pressures remain as input costs grew at a faster pace than in December.
"These numbers suggest it's premature for the RBI to cut policy rates and that they have to await evidence of a significant and sustained decline in inflation and/or further materialization of downside risks to growth before they can roll out rate cuts," Eskesen said.
Wholesale inflation, the main measure of price pressures in India, slowed to a two-year low of 7.47 percent in December as rising food costs slowed sharply. However, manufacturing inflation was still strong, leaving the central bank little room for more aggressive policy measures to help growth.