Indian manufacturing keeps up pace in May

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India's manufacturing sector kept up its steady expansion in May, with fast-rising output evened out by slowing growth of domestic order books, a business survey showed on Friday.

The HSBC manufacturing Purchasing Managers' Index (PMI), compiled by Markit, slipped marginally to 54.8 in May from 54.9 in April.

It has stayed above the 50 mark, that separates growth from contraction, for a little over three years now.

While the survey indicated growth in India's dominant manufacturing sector remains moderate, there are still question marks about the underlying weakness in the wider economy.

Official data on Thursday showed India's economy grew 5.3 percent in the quarter to March, the slowest pace in nine years, hurt by a shrinking manufacturing sector.

"Activity in the manufacturing sector kept up the pace in May with output, quantity of purchases and employment expanding at a faster pace. New orders decelerated slightly, led by domestic orders," said Leif Eskesen, economist at HSBC.

The survey's output index rose to 56.4 in May from 56.1 in April, while the employment sub-index rose to its highest level in ten months.

Still, prices continued to soar and although the pace of price hikes dropped slightly from April, the survey showed the Reserve Bank of India still faces a tough task balancing lukewarm growth with relentless inflation.

The central bank cut its key interest rate by a greater than expected 50 basis points in April to boost the flagging economy, but warned that it had little room to manoeuvre as inflation was likely to remain elevated.

"Inflation is still high by historical standards. In light of these numbers, the RBI does not have a strong case for further rate cuts, which if implemented could add to lingering inflation risks," added Eskesen.

On the bright side, the PMI survey showed new export orders continued to grow at a strong pace in May, despite economic and political strife taking hold in Europe, one of India's main trading partners.