India's manufacturing sector activity growth accelerated to a three-month high in May, driven by demand strength, infrastructure projects and new business gains, even amid inflationary pressures, a monthly survey said on Monday.

The seasonally adjusted HSBC India Manufacturing Purchasing Managers' Index (PMI) posted 55.0 in May, above the April reading of 54.7, indicating the strongest improvement in the sector's health in three months.

HSBC India Manufacturing Purchasing Managers' Index (PMI) is a gauge of overall conditions derived from measures of new orders, output, employment, supplier delivery times and stocks of purchases.

In the Purchasing Managers' Index (PMI) parlance, a print above 50 means expansion, while a score below 50 denotes contraction.

Goods producers reported the fastest expansions in new orders and output since February and cited factors like demand strength, infrastructure projects, and new business gains as the main reasons behind the upturn.

"India's final manufacturing PMI points to another month of possible precautionary stockpiling as the Middle East conflict remains unresolved. Output growth accelerated, while purchasing activity and stocks of finished goods rose at a faster pace," said Pranjul Bhandari, Chief India Economist at HSBC.

Underlying data showed that the domestic market provided impetus to growth, as new export orders rose at a softer pace.

On the price front, the war in the Middle East continued to exert pressure on cost burdens. Panel members signalled greater outlays on energy, fuel, materials and transportation.

"Input cost inflation eased slightly on the month, and output price inflation slowed more sharply, suggesting a potential squeeze on manufacturers’ margins," Bhandari said.

Notwithstanding sharp increases in input costs, goods producers purchased more materials in May. Moreover, the pace of growth in buying levels was sharp, the quickest in three months and above the historical trend. Underpinning the rise were attempts to raise contingency stocks.

Meanwhile, greater production requirements induced another round of job creation across India's manufacturing industry. The rate of expansion was solid, despite slowing from April.

Business confidence remained positive, with companies hoping that cost pressures will fade later in the year. Advertising and strong order pipelines also supported optimism towards growth prospects.

The HSBC India Manufacturing PMI is compiled by S&P Global from responses to questionnaires sent to purchasing managers in a panel of around 400 manufacturers.

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