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A Mahindra XUV500 is pictured at the assembly line inside the company's manufacturing plant in Chakan, India, September 30, 2016. Mahindra is likely to report sharp drop in volume sales, according to Nirmal Bang Institutional Equities.Reuters file

Demonetisation affected India's manufacturing sector's expansion in November, according to the Nikkei India Manufacturing Purchasing Managers Index (PMI). The PMI for November came in at 52.3, down from 54.4 in October.

With softer expansion in new business inflows, order books rose at a moderate pace that was the slowest since July.

"Manufacturing production growth slowed amid reports of cash shortages…softer increases in output were noted in each of the three monitored sectors, with consumer goods producers recording a sharp slowdown in growth," the survey report said.

However, concurrently, despite cash crunch hitting manufacturing, it continued to expand albeit at a slower pace. Inflation rates for both output charges and purchase costs eased since October.

Higher prices paid for payment for various raw materials pushed up input costs. With easing of rate of inflation, November data indicated that 96% of companies reported unchanged selling prices. Subsequently, the rate of charge inflation softened and was marginal.

"Of respite to firms, cost inflationary pressures softened, which in turn encouraged the vast majority of businesses to keep their selling prices unchanged. If this trend is sustained we will likely see further cuts to the benchmark rate….Furthermore, although many surveyed companies commented that further disruption is expected in the near-term, the demonetisation of the rupee is anticipated to ignite growth in the long-run as unregulated companies leave the market," Pollyanna de Lima, economist at Markit said in a statement.

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