India's manufacturing sector surged in February, experiencing its most robust growth in five months, driven by heightened global demand and reduced inflationary pressures, according to a private survey.

The HSBC final India Manufacturing Purchasing Managers' Index (PMI), compiled by S&P Global, climbed to 56.9 in February, surpassing January's 56.5 and exceeding a preliminary estimate of 56.7. This marks the 32nd consecutive month that India's manufacturing PMI has remained above the 50-mark, indicating expansion.

India, Asia's third-largest economy and the world's fastest-growing major economy, recorded an impressive 8.4% expansion in the October-December quarter, fueled in part by a surge in manufacturing output, as per government data released on Thursday. The growth rate surpassed expectations, with the manufacturing sector expanding by 11.6% year-on-year last quarter, accounting for 17% of India's GDP.

Ines Lam, an economist at HSBC, highlighted that the strong production growth was supported by both domestic and international demand, resulting in improved margins for manufacturing firms as input price inflation decreased to its lowest level since July 2020.

Output and new orders sub-indexes reached five-month highs, propelled by increased sales and enhanced technology, leading to higher production volumes. Global demand also witnessed a robust uptick, with the rate of expansion hitting its highest level in nearly two years, driven by increased demand from various countries including Australia, China, the United States, and the United Arab Emirates.

While optimism about future output slightly cooled from January's peak, it remained positive. However, despite the optimistic outlook, the survey revealed that employment in the sector remained stagnant, with participants reporting adequate staffing levels for existing workflows.

Cost pressures experienced the slowest increase since mid-2020, while firms capitalized on the positive business outlook and subdued inflationary pressures to stock up on raw materials, driving the quantity of purchases sub-index to its highest level in five months.

Moreover, the output price index eased to its joint lowest level since March 2023, indicating a decline in inflationary pressures. The Reserve Bank of India is anticipated to maintain interest rates until at least July, according to a Reuters poll, given the continued strong growth and inflation within the target range of 2-6%.