(Reuters) - Indian manufacturing activity grew at a slower pace in March as weaker domestic demand dragged on output growth, a business survey showed on Tuesday.
The HSBC Manufacturing Purchasing Managers' Index (PMI), which gauges business activity in Indian factories but not its utilities, fell to 51.3 in March after surging to a one-year high of 52.5 in February.
Foreign orders came in at their fastest pace in almost three years but the overall new orders index - which measures both domestic and foreign demand - fell to 52.7 in March from 54.9.
That pushed the output index down to its lowest level this year, although at 52.2 it was still comfortably above the 50 mark that divides growth from contraction.
"The momentum in the manufacturing sector eased on the back of a slowdown in order flows and raw material shortages. Meanwhile, inflation also moderated,", said Leif Eskesen, chief economist for India & ASEAN at HSBC.
The survey showed input and output prices rose at their slowest pace in nine months, suggesting inflation will ease further in the coming months after cooling in February.
Wholesale inflation came in lower than expected in February as food and fuel prices moderated, while consumer price inflation eased for the third straight month to a 25-month low, official data showed.
This means the Reserve Bank of India likely will leave interest rates unchanged at its meeting later on Tuesday, a Reuters poll conducted last week predicted.
High borrowing costs, stubbornly high inflation and the government's inability to push through key reforms have hurt growth in Asia's third-largest economy, which slowed to a near decade-low of 4.9 percent in the December quarter.
But investors' confidence has revived in recent weeks as this month's general election is expected to usher in a new government led by the opposition Bharatiya Janata Party, which is widely perceived to be more business-friendly.
Editing by Kim Coghill