Factory growth eases, but keeps healthy pace in Feb

A worker moves iron pipes after unloading them at a factory in an industrial area in Mumbai, February 29, 2012.

BANGALORE (Reuters) - India's manufacturing sector expansion slowed slightly in February from a month ago, although the pace of growth remained healthy as new orders touched a 10-month high, a business survey showed on Thursday.

The HSBC manufacturing Purchasing Managers' Index (PMI), compiled by Markit, eased to 56.6 in February from 57.5 in January, which was an eight-month high.

The index has held above the 50 mark that separates growth from contraction for almost three years, although the outlook painted by official data is not as rosy.

Strong growth in the new orders sub-index, which rose to 62.8 in February, and factory output drove the expansion in the sector.

However, employment contracted for the first time in three months and export orders grew at their slowest pace since November, the survey showed.

"Activity in the manufacturing sector continued to expand in February, although at a slightly slower pace. Output growth eased and employment fell, but domestic orders grew at a faster clip," said Leif Eskesen, economist at HSBC.

Price pressures also rose, with the sub-index for output prices, or the cost of finished products, hitting an 11-month high, and the survey suggests inflation could tick up.

A fall in the headline inflation, as measured by the wholesale price index, to 6.55 percent in January, its lowest level in more than two years, had raised expectations the Reserve Bank of India could start easing policy.

"PREMATURE TO CUT RATES"

After 13 rate rises to stamp out inflation in between March 2010 and October 2011, the central bank signalled in January it was shifting its focus to growth by cutting the cash reserve requirements for banks by 50 basis points.

"These numbers suggest it's premature for the RBI to cut policy rates at the March meeting and that the easing cycle, expected to commence in April-June, will have to be gradual," Eskesen added.

The PMI survey, showing continued strength, is at odds with official data which points to a prolonged slowdown in the manufacturing sector and the wider economy.

The Index of Industrial Production (IIP) showed factory activity slowed sharply in December as rate-sensitive sectors such as capital goods and mining shrank. Output grew an average 1 percent in annual terms for October to December.

As a result, India's economy grew at a slower-than-expected 6.1 percent in the three months to December, the weakest annual pace in almost three years.

Further, the infrastructure sector, which accounts for 38 percent of industrial output, grew at a feeble 0.5 percent annual rate in January.

(Edited by Andy Bruce and Ramya Venugopal)