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Factory activity shrinks for third straight month - poll

By Yati Himatsingka

BANGALORE (Reuters) - Indian factories cut production in October with overall manufacturing activity contracting for the third straight month as order books shrank at a quicker pace, a survey showed on Friday.

Another grim Purchasing Managers' Index (PMI) suggests the slowdown in Asia's third-largest economy is becoming entrenched despite some mark up in overseas demand which prompted firms to hire more workers.

The HSBC Manufacturing PMI compiled by Markit was unchanged at 49.6 in October, remaining below the watershed 50 mark that separates growth from contraction.

"Manufacturing activity contracted for the third consecutive month in October. Order flows remain weak, despite a bounce-back in export orders after two months of decline," said Leif Eskesen, chief economist for India at survey sponsor HSBC.

While demand for the country's exports improved after drying up for a couple of months, overall new orders contracted at a quicker rate, offering little hope that softness in domestic demand may be leveling off.

The new orders sub-index fell to 48.9 last month from 49.6 in September, its fifth month below 50.

A slew of surveys and data over the past few months have stoked fears the economy grew at a slower pace in the quarter to September than the 4.4 percent seen between April-June, its slowest quarterly growth rate since early 2009.

Compounding policymakers' problems is a stubbornly high inflation rate which shows no signs of abating, especially after the Indian rupee was battered between May and September, when rising U.S. bond yields prompted investors to dump emerging market assets.

The weaker currency has pushed up prices of imported goods and coupled with higher food costs drove wholesale inflation to a seven-month high of 6.46 percent in September.

The Reserve Bank of India has responded with back-to-back interest rate hikes, taking the policy repo rate to 7.75 percent to curb rising prices.

The PMI survey showed input costs grew last month at their quickest pace since June 2012. Output costs also rose at the fastest rate since February.

"Input price inflation accelerated further despite the weak growth backdrop, as the effects of the depreciated exchange rate continue to pass through. This suggests that the RBI has to continue its staring contest with inflation," Eskesen said. (Editing by Kim Coghill)