REUTERS - Indian factory activity cooled in September on slowing growth in new orders and production and as manufacturers charged slightly higher prices, although muted inflation should give the central bank room to ease policy further, a survey showed.
The data, out just a day before the Reserve Bank of India's latest policy review, would probably raise the clamour in markets for a rate cut from incoming chief Urjit Patel.
The Nikkei/Markit Manufacturing Purchasing Managers Index fell to 52.1 in September from August's 52.6, marking its ninth straight month above the 50 level that separates growth from contraction.
"The Indian manufacturing industry lost momentum in September, as growth of new orders eased from August's 20-month high," said Pollyanna De Lima, economist at survey compiler Markit.
"However, output is still rising at a decent clip and the sector looks likely to have delivered a stronger contribution to GDP growth in Q2 FY2016/17 (July-Sept)."
The new orders sub-index, which takes into account both domestic and external demand, was 53.6 in September, down from 54.8 in August, which was its highest since December 2014.
The deceleration in demand led to firms cutting output slightly last month.
Factories however paid higher prices for raw materials in September and they passed on some of those costs to consumers, according to the survey.
"Although inflation rates edged higher, these remain weak by historical standards and indicate that we may still see the RBI loosening monetary policy in 2016," De Lima added.
The consensus view from economists polled by Reuters last week was that the RBI would hold policy steady on Oct. 4, but there was a high probability of it cutting the repo rate to 6.25 percent in the final three months of the year.
Consumer inflation in India cooled sharply to 5.05 percent in August, almost at the RBI's March 2017 medium-term target of 5 percent, and with favourable monsoon rains, it is expected to tread lower in coming months.
Reporting by Sumanta Dey; Editing by Richard Borsuk