Jan PMI at 53.2, slowest in 3 months

Underscores risks to India's economy from weak global demand, particularly in Europe

Growth in Indian manufacturing slowed to a three-month low in January, as new export orders lost momentum, a business survey showed on Friday, underscoring the risks to India's economy from weak global demand, particularly in Europe.

The HSBC Markit manufacturing Purchasing Managers' Index (PMI), fell to 53.2 in January, after surging to a six-month high of 54.7 in December.

The January PMI reading, which gauges business activity in India's factories but not its utilities, was the lowest since October.

"The growth momentum in the manufacturing sector eased in January as a slower expansion in new orders slowed output growth," said Leif Eskesen, economist at HSBC.

Although India appears set to end the current fiscal ending in March with its slowest economic growth in a decade, for almost four years the monthly PMI has held above 50, the level that divides growth and contraction compared to the previous month.

"To meet new orders manufacturers still rely on a drawdown in stocks of finished goods, which should provide support for output growth in coming months as stocks are replenished," Eskesen said.

The PMI survey showed stocks contracting, but less quickly than in December.

Relatively weak global trade is partly to blame, particularly from Europe, India's largest trade partner, with the debt-ravaged euro zone economy expected to contract again this year.

The new export orders sub-index slipped to 54.6 in January, showing the slowest pace of growth since October.

It was a disappointing signal for an economy that needs to see a narrowing in a current account deficit that hit a record 5.4% of GDP in the September quarter, with a similar gap expected in the December quarter.

Most recent official data shows India's industrial output grew in just three of the eight months through November, when it unexpectedly shrank 0.1% from a year earlier as exports fell for an eighth month in a row.

The HSBC Markit survey also showed input and output prices rose at a slower pace during the month, suggesting India's inflation rate, which slowed to a three-year low of 7.18% in December, is unlikely to change much, at least for now.

"Input and output price inflation continued to ease, albeit only gradually, supporting the case for the RBI's cautious policy rate cut earlier this week," added Eskesen.

Citing the moderation in inflation, the Reserve Bank of India cut its repo rate for the first time in nine months on Tuesday by 25 basis points to 7.75%.

Whereas the central bank said this week that stopping the decline in growth was crucial, it also warned that it has limited leeway to ease monetary policy.

But the bank said it would ease if inflation and a worryingly high current account moderated by more than expected.

At the same time, the bank has urged the government to make more reforms to revive investor sentiment and bring a bloated fiscal deficit under control.

Finance Minister P Chidambaram is due to announce the annual budget on February 28, and has already said he intends to reduce the fiscal deficit to below 4.8% of GDP in FY14 from a targeted 5.3% in FY13.