India Sept factory growth picks up pace on strong demand and exports

(Reuters) - Indian factory activity expanded more quickly in September on strong domestic and export order growth, a business survey showed, a welcome sign of strength as policy makers worry about a sharp drop in the rupee and fallout from global trade frictions.

Taken together with evidence of higher inflation pressures from a weak currency and rising oil prices, the survey results may bolster already-firming expectations for an interest rate hike this week from the Reserve Bank of India.

The Nikkei Manufacturing Purchasing Managers' Index, compiled by IHS Markit, rose to 52.2 in September from 51.7 in August.

While the latest PMI was slightly below a Reuters poll median of 52.4, it has held above the 50 threshold that separates growth from contraction for 14 straight months.

The new orders sub-index, a proxy for overall demand, rose to 53.0 from 52.5. And the export orders index rose to the highest in eight months.

"Growth of India's manufacturing sector picked up during the latest survey period, reflective of strengthening demand especially from foreign clients, which helped to drive export growth up to its highest level since the turn of the year," Paul Smith, economics director at IHS Markit, said in a release accompanying the survey.

However, optimism about future output slipped to the lowest since June 2018, the survey showed.

An escalating U.S.-China trade war has pushed up the dollar and hurt emerging market assets, including the rupee which is down over 13 percent this year and is ramping up the cost of crude oil imports.

The weaker rupee and oil - India's biggest import - pose a serious upside risk to inflation.

To support the rupee and reduce inflation pressure, the Reserve Bank of India was forecast to hike its repo rate to 6.75 percent on October 5, according to a Reuters poll.

Stronger demand allowed firms to increase the prices of their goods at the fastest pace in three months in order to offset rising input costs, the PMI survey showed.

That suggests inflation may inch back above the central bank's medium-term target of 4 percent over the coming months.

"Rising prices continued to weigh on sentiment, with confidence dropping a little to reach a three-month low," Smith said.

"Nonetheless, on balance, firms remain confident that output will continue to rise, buoyed by recent new business wins and expectations this will continue over the next 12 months.

(Reporting by Vivek Mishra; Editing by Shri Navaratnam)