Factory index accelerates to five-month high in Nov

BANGALORE Mon Dec 3, 2012 10:41am IST

A worker assembles an engine inside the Royal Enfield motorcycle factory in Chennai April 6, 2012. Picture taken April 6, 2012. REUTERS/Babu/Files

A worker assembles an engine inside the Royal Enfield motorcycle factory in Chennai April 6, 2012. Picture taken April 6, 2012.

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BANGALORE (Reuters) - India's manufacturing sector beat the expectations of economists to grow at its fastest pace in five months in November, boosted by strong export orders and a surge in output, a business survey showed on Monday.

The HSBC manufacturing Purchasing Managers' Index (PMI), which gauges the business activity of India's factories but not its utilities, rose to 53.7 in November from 52.9 in October.

Readings above 50 denote growth, and economists had forecast a rise to 53.1 in November.

Although India's factory activity has now expanded for over three-and-a-half years, it is a long way from the robust growth seen before the onset of the financial crisis in 2007.

Asia's third-largest economy grew 5.3 percent from a year earlier in the quarter to September, provisional government data showed last week, extending its long slowdown. It is now headed for its weakest full year growth in a decade.

"The manufacturing sector gained momentum thanks to a strong pick up in new orders, which lifted output growth," said Leif Eskesen, economist at HSBC.

The new export orders sub-index rose to a six-month high of 55.9 in November, giving thrust to overall orders and factory output, both of which expanded at their fastest pace since July.

While there is strong overseas demand for Indian goods, a looming fiscal crisis in the United States could put the brakes on exports if lawmakers fail to agree a fix, as happened between July and October 2011, when the U.S. last hit a legal debt ceiling.

The survey also showed both input and output prices rose sharply in November, after rising at a slower pace in October.

That could put renewed pressure on India's headline inflation rate which at 7.5 percent in October, is well above the Reserve Bank of India's commonly perceived comfort zone around 5 percent.

"Inflation picked up again as higher raw material prices increased input costs for firms and they had enough pricing power to pass these on to end consumers due to the firm demand conditions," Eskesen said.

The central bank has held interest rates steady since April, citing high price pressures, even as many other central banks around the world have cut rates.

It has, however, cut the cash reserve ratio from 6.00 percent to 4.25 percent between January 2011 and October this year to prevent a potential liquidity crunch in financial markets.

With growth slowing in recent months, the din for a rate cut from financial markets has grown louder. But Eskesen said the PMIs suggest the central bank should not ease rates.

(Editing by Eric Meijer)

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