By Yati Himatsingka
BANGALORE (Reuters) - Factory activity in India shrank for a second month in September, albeit not as sharply as in August, on a dearth of new orders which pushed firms to cut staff, a survey showed on Tuesday.
Another grim Purchasing Managers' Index (PMI) comes as Asia's third-largest economy grapples with its worst slowdown in a decade and policymakers struggle to put a floor under the battered currency.
The HSBC Manufacturing PMI, compiled by Markit, rose to 49.6 in September from 48.5 in August, but remaining below the watershed 50 mark that separates growth from contraction.
The index, which gauges business activity in Indian factories but not utilities, has hovered near that 50 mark from May but falling orders dragged it under in August for the first time in more than four years.
"Manufacturing activity continued to shrink in September. Order flows remain weak, especially export orders, and employment fell," said Leif Eskesen, chief economist for India at survey sponsor HSBC.
While orders from abroad shrank at a quicker pace on a capricious global economy, overall new orders contracted at a slower rate, offering hopes that softness in domestic demand may be leveling off.
While the new orders sub-index rose to 49.6 last month from 47.5 in August, it spent its fourth month below 50, prompting firms to cut staff for the first time since February 2012.
A slew of surveys and data over the past months have stoked fears the economy grew at an even weaker pace in the current quarter than the 4.4 percent seen in April-June, its slowest quarterly growth rate since early 2009.
Compounding policymakers' problems, a yawning current account deficit has driven funds out of the country and further hammered the Indian rupee.
The currency lost over 20 percent of its value between January and late-August, when it sank to a record low of 68.85 to the dollar, but it has since recovered around 10 percent on central bank measures to attract more capital.
Data released on Monday showed India's current account deficit widened to 4.9 percent of gross domestic product (GDP) in the June quarter from 3.6 percent in the previous three months, although the gap grew less than expected.
The weaker currency has pushed up prices of imported goods and coupled with higher food costs drove wholesale inflation to a six-month high in August.
The latest PMI survey showed input costs grew at their fastest pace since June 2012.
"Despite the weak growth readings, the build-up in underlying inflation pressures suggests that the RBI has to keep its inflation guards up," Eskesen said.
New Reserve Bank of India chief Raghuram Rajan surprised financial markets by raising the key repo rate by 25 basis points to 7.50 percent last month to ward off rising inflation, but scaled back some of the emergency measures put in place to support the ailing rupee.
Economists in a Reuters poll taken last week were split over whether he will hike rates again at the RBI's next policy review on October 29.
(Editing by Kim Coghill)