REUTERS - Indian manufacturing activity unexpectedly returned to growth in January as firms raised output on stronger demand, a survey showed, adding to expectations the central bank will likely leave policy unchanged this month.

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The Nikkei Manufacturing Purchasing Managers’ Index (PMI), compiled by Markit, jumped to a four-month high of 51.1 in January after slumping to a 28-month low of 49.1 in December. The 50-mark demarcates contraction from expansion.

A Reuters poll predicted a more modest rise to 49.6.

“The opening month of 2016 saw a rebound in new business – from both domestic and external clients – leading manufacturers in India to scale up output following a short-lived downturn recorded in December,” said Pollyanna De Lima, economist at Markit.

“January’s PMI data paint a brighter picture of the Indian economy.”

The new export orders sub-index rose to 52.5 from 51.5, the highest reading in five months, which coupled with a similar increase in domestic orders suggest renewed demand for Indian goods both home and abroad.

That is good news for the Reserve Bank of India which cut rates four times last year, by a cumulative 125 basis points, to boost economic growth as inflation remained subdued.

But retail inflation is currently above the RBI’s 5 percent target for March 2017 and the PMI showed firms increased prices at a steeper rate even though input costs rose at a slower pace.

“Although the RBI is likely to continue its monetary policy loosening cycle in 2016, February’s meeting will probably see the repo rate remain unchanged at 6.75 percent as the central bank will remain wary of inflationary pressures building in the country,” said De Lima.

A Reuters poll last month suggested the RBI would cut interest rates once more in the coming year, probably next quarter.