India's factory activity accelerated in July as domestic demand and output strengthened, encouraging firms to hire at the fastest rate in five months, a private business survey showed on Thursday.

The Nikkei Manufacturing Purchasing Managers' Index, compiled by IHS Markit, rose to 52.5 in July from June's 52.1. It has remained above the 50-mark separating contraction from growth for two years.

"Survey participants linked the uptick in growth to a pick-up in demand, mostly stemming from successful marketing efforts, competitive pricing and favourable public policies," Pollyanna De Lima, principal economist at IHS Markit, said in a release.

"We see from underlying data that the domestic market provided the main impetus to sales growth."

New orders, a measure of overall demand, came in at a faster pace last month and helped boost factory output. But growth in foreign demand slowed to its weakest rate in 15 months, the survey showed.

Overseas demand was hampered by slower global trade flows, underscoring the broadening impact of international tariff tensions, especially led by the bruising Sino-US row that has entered its second year with no resolution in sight.

Although input costs rose at a slower pace last month firms raised prices for the first time in three months. Yet the marginal increase suggests overall inflation will remain below the Reserve Bank of India's (RBI) medium-term target of 4 per cent.

"The relatively negligible increases in input costs and output charges...suggest that we will likely see a further reduction in India's benchmark interest rate as the RBI continues its effort to support economic growth," Ms De Lima said.

Indeed, RBI policymakers are expected to cut borrowing costs for the fourth meeting in a row this month, a Reuters poll showed.

Those expectations boosted optimism to the highest since March and prompted manufacturing firms to hire at the fastest pace since February, the survey showed.

India's economy grew at its slowest pace in more than four years in the January-March period, falling behind China's pace for the first time in nearly two years.