Growth in India's factory activity slowed to a four-month low in February as new orders eased and weighed on output after manufacturers raised prices at the fastest pace in a year, a business survey showed on Wednesday.
That suggests retail inflation could continue to pick up over coming months, pressuring the Reserve Bank of India (RBI) to raise interest rates despite concerns that tighter policy could weigh on economic growth.
The Nikkei Manufacturing Purchasing Managers' Index, compiled by IHS Markit, fell to 52.1 in February from January's 52.4 and was below the 52.8 expected in a Reuters poll.
But it held above the 50 mark that separates growth from contraction for the seventh consecutive month.
"Cost inflation accelerated to the sharpest since February 2017, adding to expectations that inflationary risks will continue over the coming months," Aashna Dodhia, an economist at IHS Markit, said in a release.
The minutes of the February RBI meeting released last week showed policymakers were increasingly worried about accelerating inflation.
"The economic recovery is also at a nascent stage and calls for a cautious approach at this juncture," RBI Governor Urijit Patel was quoted as saying.
While retail inflation eased in January from a 17-month high in the prior month, price rises are still above the RBI's medium-term target of 4 percent on rising energy costs and expectations for an increase in rural spending by the government.
"Amid a stronger oil price forecast and growing fiscal risks, IHS Markit upgraded its CPI forecast to 5.2 percent for fiscal year 2017/2018," Dodhia said.
The new orders sub-index, an indicator of domestic and export demand, fell to 52.3, its lowest since October.
That is well below the long-run mean average of 57.1 for orders and marked the second consecutive month it has fallen. Export order growth, while pulling back slightly, was still solid.
While firms remained quite optimistic about future output, the survey's findings suggested the world's seventh-largest economy has not completely overcome the disruptions to demand from a ban of high-value currency notes in November 2016 and the implementation of a goods and services tax (GST) on July 1.
Although companies raised hiring at a modest pace in February in response to greater production requirements, optimism about future output slipped to three-month low.
India's economy is expected to have grown at its fastest pace - 6.9 percent - for a year in the last quarter of 2017, a separate Reuters poll showed. The data will be released later on Wednesday.
In the same period, manufacturing activity registered its highest average quarterly growth rate since the fourth quarter of 2014.