Activity in India's manufacturing sector expanded at the fastest pace in five months in March as output and new orders accelerated, according to a private survey that also showed price pressures eased.
The Nikkei Manufacturing Purchasing Managers' Index, compiled by IHS Markit, rose to 52.5 in March, from 50.7 in February, the third month in a row that is has been above the 50 mark that separates growth from contraction.
Output and new orders sub-indexes rose to their highest since October 2016, suggesting the world's fastest growing major economy has largely recovered from Prime Minister Narendra Modi's shock decision in November to ban high-value currency notes.
The move caused huge disruptions to daily life and businesses in the largely cash-based economy.
The survey also showed encouraging signs on the inflation front, which has come squarely back on the central bank's radar in recent months.
"The favorable demand environment was supported by relatively muted inflationary pressures. Given that input costs rose at a softer pace, a whopping 96 percent of goods producers kept their selling prices unchanged over the month," said His Markit economist Pollyanna De Lima.
Input prices rose at a slower pace compared to February, and there was a corresponding slowdown in the pace of output price rises as well, which likely helped increase demand.
The new orders index rose to a 5-month high of 53.6 from 51.3 the previous month.
Indian inflation picked up pace in February to 3.65 percent, after slowing in the previous month to 3.17 percent, its lowest in at least five years, but it was still below the central bank's 4 percent target.
The Reserve Bank of India shifted its stance to neutral from accommodative and kept the policy repo rate unchanged at 6.25 percent in its February meeting, opting to wait for more clarity on inflation trends and the impact of demonetization.
Economic growth for the October-December quarter came in at 7.0 percent, a bit slower than the 7.4 percent in the previous quarter but much faster than the 6.4 percent expansion forecast by economists in a Reuters poll, many of whom had expected a sharper hit from the cash crunch.
India's lower house of parliament on Wednesday passed key legislations paving the way for implementation of a nationwide goods and services tax (GST) from July, which is expected to spur economic growth by 1 to 2 percentage points.
Most manufacturing and services items will be taxed at standard rates of 12 percent and 18 percent under the four-slab GST structure.
(Editing by Kim Coghill)