Factories post fastest growth for 17 months in July

By Sumanta Dey

BANGALORE (Reuters) - India's factory activity expanded at its fastest pace in 17 months in July as firms responded to burgeoning new orders by increasing output even as input prices jumped sharply, a business survey showed on Friday.

The HSBC Manufacturing Purchasing Managers' Index (PMI), compiled by Markit, rose to 53.0 in July from 51.5 in June, its highest since February 2013. A reading above 50 separates growth from contraction.

While the PMI has signalled an expanding manufacturing sector for nine months, a surge in new orders in July helped drive the solid improvement in business conditions.

The new orders sub-index soared to 55.9, its highest since February last year. That was the biggest monthly jump in the measure in eight months.

"A flood of new orders from both domestic and external sources has led to a surge in activity," said Frederic Neumann, co-head of Asian economic research at HSBC.

"Details within the survey show that all monitored categories witnessed a rise in output and order flows."

However, the strong reading was tempered by a sharp increase in the cost of raw materials.

Input prices rose at their fastest pace since February, indicating inflation may remain elevated in coming months as companies seek to pass on the higher costs although that is not something they did to a large extent last month.

"The speed of the recovery has also lifted price pressures... This means that the Reserve Bank of India may not cheer as loudly as the rest of us," Neumann added.

Consumer inflation eased to 7.3 percent in June, but fears of a spike in food prices if there is below average rainfall will probably prompt the central bank to hold its key interest rates steady at its next meeting on Aug. 5.

(Editing by Kim Coghill)