Factory activity jumps to highest in six months

Employees work inside a steel factory in Ahmedabad November 24, 2010.

BANGALORE (Reuters) - India's manufacturing activity surged to a six-month high in December, boosted by strong factory output and a spike in new orders, both of which hit their highest levels since June, a business survey showed on Wednesday.

The HSBC Markit India Manufacturing PMI, which gauges the business activity of India's factories but not its utilities, jumped to 54.7 in December from 53.7 in November, its biggest monthly rise since January 2012.

The PMI index has now stayed above the 50 mark that separates growth from contraction for almost four years.

"Activity in the manufacturing sector picked up again, led by faster output growth and a further uptick in new orders, which led to a faster increase in backlogs of work as companies struggled to keep up with demand," said Leif Eskesen, economist at HSBC.

Official data released last month showed industrial output soared 8.2 percent annually in October, its highest in more than a year, although the rise was attributed by economists to a low base a year earlier.

However, the new orders sub-index in the survey, a reliable gauge of future output, jumped to 58.0 from 55.8 in November, its biggest monthly jump since April, suggesting the factory sector might be in for better days ahead.

New orders from overseas clients also grew at a faster pace than last month, the fourth consecutive expansion after shrinking during July and August.

While there is strong overseas demand for Indian goods, the U.S. economy will remain sluggish in 2013, underscoring a very fragile world economic outlook, according to a Reuters poll.

The survey further showed both input and output prices rose at a slower pace during the month. That will likely take some steam off the headline inflation rate, which at 7.24 percent in November is well above the Reserve Bank of India's commonly perceived 5 percent comfort level.

The central bank has held interest rates steady since April, citing high price pressures, even as financial markets and the government have clamoured for rate cuts.

A majority of economists polled by Reuters last month expect a total of 50 basis points cut in the benchmark repo rate by March, citing weak growth and a generally declining inflation trend.

But Eskesen said inflation only eased marginally and expects it to remain strong in the coming months with firmer demand leading the pick up in growth. (Editing by Kim Coghill)