India's factory output hit an eight-month high in March on the back of strong business orders, resulting in increased output by manufacturing firms. The Nikkei India Manufacturing Purchasing Managers' Index (PMI) rose to 52.4 last month and remained above the crucial differentiator of 50 for the third consecutive month of growth, reported PTI Monday. 

This is the highest reading since 52.3 recorded in August 2015. A reading below 50 indicates contraction according to the PMI.

"PMI data suggests we should expect another quarter of robust economic growth in the last quarter of the 2015-16 financial year," the agency quoted Pollyanna De Lima, economist at Markit and author of the report, as saying.

On the flip side, the cost inflation gathered pace and touched a 16-month high. The benefits of a continued fall in commodity and oil prices were neutralised by a spike in raw material costs as a result of a weaker rupee. This could dampen hopes of a cut in interest rates by the Reserve Bank of India.

"This build-up in inflationary pressures may lead Reserve Bank to hold off from cutting rates, especially as solid growth was seen," Lima said.

The RBI will meet Tuesday for its first monetary policy review for the current financial year. Bankers and economists are expecting the apex bank to cut the current policy rate (repo rate) by 25 to 50 basis points (bps) from the current 6.75 percent. They are factoring in retail inflation that is hovering around 5 percent, the bank's comfort zone.

"Going by RBI's stated preference for maintaining real interest rate in the 1.5-2% range, there is room for 50bps rate cut," said Religare Institutional Research in its note Monday. "However, RBI may cut repo rate by only 25bps in April policy and rather wait for further development on monsoon and 7CPC implementation while also taking steps to improve transmission," it added.

Another economist also expressed a similar opinion. "Consensus and our expectations are for a 25bp cut in the benchmark repurchase rate to 6.5 percent," said Radhika Rao, economist, DBS Bank, in her Monday update.

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