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India's December factory activity picks up to seven-month high but business optimism weakens

BENGALURU (Reuters) - India’s factory activity expanded at its fastest pace in seven months in December as a jump in new orders prompted companies to ramp up production, a private business survey showed on Thursday.

A worker pours molten iron from a ladle to make automobile spare parts inside an iron casting factory in Ahmedabad, January 31, 2019. REUTERS/Amit Dave/File Photo

Business optimism fell to an almost three-year low, however, as companies worried about challenging market conditions.

The Nikkei Manufacturing Purchasing Managers’ Index, compiled by IHS Markit, rose to 52.7 in the final month of 2019 from November’s 51.2.

The reading was the highest since May. It also remained above the 50-mark that separates growth from contraction for a 29th month, the longest since July 2013.

“The uptick in Indian manufacturing sector growth signaled by the latest PMI results will be welcomed by policymakers, particularly given the concerning results observed in October,” noted Pollyanna De Lima, principal economist at IHS Markit.

“Factories benefited from a rebound in demand, and responded by scaling up production to the greatest extent since May.”

A sub-index that tracks overall demand in the sector hit a five-month high in December, which along with a strong growth in output led firms to hire at the quickest pace since early 2019.

Solid growth in demand was despite output prices rising at the fastest rate in nearly three years and input cost inflation hitting a 13-month high, which suggest a further quickening in overall inflation.

Rising price pressures forced the Reserve Bank of India to hold interest rates steady in December after five cuts earlier in 2019 and could leave it with less room to ease policy in coming months to support the sputtering economy.

The PMI survey also showed optimism about output over the coming 12 months declined to its lowest since February 2017.

“The degree of optimism signalled at the end of 2019 was the weakest in just under three years, reflecting concerns over market conditions, which could restrict job creation and investment in the early part of 2020,” added De Lima.

Reporting by Indradip Ghosh; Editing by Kim Coghill