Factory growth accelerates in May, strong domestic demand

BANGALORE, India (Reuters) - Indian manufacturing activity rose at its fastest pace in four months in May as domestic demand rocketed despite rising costs for firms and consumers, a business survey found on Monday.

The upbeat report was released a day before the economy is expected to get another boost from a possible central bank interest rate cut, with the Reserve Bank of India holding a policy review on Tuesday.

The HSBC Manufacturing Purchasing Managers' Index, compiled by Markit, rose to 52.6 in May from April's 51.3, smashing the 51.2 that a Reuters poll of economists had predicted.

Any reading above 50 indicates expansion and May was the nineteenth straight month of industry growth. An index monitoring new business, which highlights underlying demand, jumped to 54.3 in May from 51.9.

"PMI data signalled a further robust expansion of the Indian manufacturing economy in May," said Pollyanna De Lima, economist at Markit.

"The outlook for the sector is, however, clouded by a stagnant jobs market as firms remain uncertain about the sustainability of the upturn."

Firms reduced staffing levels for the third month out of the last four in May.

What may also cause the RBI some concern is the rate of price rises - although April inflation was well within the upper-end of the central bank's target.

"Input cost inflation ticked higher... but inflation rates are nonetheless weak in the context of historical data. This indicates that further rate cuts are still on the horizon," De Lima added.

The RBI is widely expected to cut its key interest rate by 25 basis points to 7.25 percent, when it meets on Tuesday.

Indian GDP data, which released on Friday, showed the economy grew 7.3 percent in the fiscal year 2014/15, and expanded faster than China for a second consecutive quarter.

While that seems healthy there are nagging doubts over the reliability of the data. Many economists believe that changes made earlier this year to the way government statisticians calculate GDP may have distorted the macroeconomic view.

(Reporting by Siddharth Iyer; Editing by Simon Cameron-Moore)