India's factory growth slowed in August despite deep discounting

REUTERS - Indian manufacturing growth eased in August as the pace of orders softened, forcing factories to cut selling prices at the fastest rate in more than six years, a business survey showed on Tuesday.

Falling factory-gate prices are likely to filter into India's wider inflation rate, already at a record low of 3.78 percent in July, giving the Reserve Bank of India room to cut interest rates again, possibly as early as this month.

"As inflation concerns fade and demand growth loses momentum, further accommodative policy should not be discounted," said Pollyanna De Lima, economist at Markit.

A Reuters poll on Friday showed economists see a 60 percent chance of policy easing at the RBI's Sept. 29 meeting.

The Nikkei India Manufacturing Purchasing Managers' Index, compiled by Markit, fell to 52.3 in August from July's 52.7. A reading above 50 indicates expansion.

Output and orders also continued to grow, but at a somewhat slower pace.

"Growth of Indian manufacturing production waned in August on the back of softer improvements in both domestic and foreign demand. This led firms to keep payroll numbers unchanged during month," De Lima said.

The new orders sub-index slipped to 53.6 from 54.0 in July.

The slowdown comes despite manufacturers making the steepest cuts to prices since early 2009, as input costs fell for the first time in six months. Already weak commodity prices took a fresh tumble in recent weeks on fears that China's economy may be cooling more sharply than expected.

There was also a record fall in the stocks of finished goods, dropping to its lowest level since the survey began in April 2005, possibly giving factories scope to build up inventories this month, using up spare capacity.

Data late on Monday showed India's economy grew more slowly than expected in the quarter to June, a setback for Prime Minister Narendra Modi that will prompt more urgent calls from his aides for interest rate cuts.

Gross domestic product expanded at an annual 7 percent rate in the April-June quarter, matching China, but slower than provisional growth of 7.5 percent in the previous quarter.

While doubts still persist over India's new way of calculating GDP, there is no denying the fact that the economy is still struggling to gather steam.

(Reporting By Krishna Eluri; Editing by Kim Coghill)