BENGALURU - Indian factory activity decelerated sharply last month after Prime Minister Narendra Modi's currency crackdown led to a rationing of cash and cooled domestic consumption, new orders and production.
The Nikkei/Markit Manufacturing Purchasing Managers' Index fell to 52.3 in November from October's 54.4, its biggest month-on-month decline since March 2013.
However, it held above the 50 mark that denotes growth for the eleventh straight month.
"PMI data for November showed that the sudden withdrawal of high-value banknotes in India caused problems for manufacturers, as cash shortages hampered growth of new work, buying activity and production," said Pollyanna De Lima, economist at survey compiler IHS Markit.
The new orders sub index that measures both foreign and domestic demand was knocked down to 53.3 from 57.7 in October, the largest monthly fall in over 4-1/2 years.
Modi's decision last month to scrap 500 and 1,000 rupee banknotes as part of a crackdown on tax dodgers and counterfeiters removed 86 percent of the currency in circulation virtually overnight.
That left banks flush with cash but knocked consumption and investment and led to markets calling for aggressive rate cuts from the RBI to support demand.
Slowing demand in the world's fastest growing major economy could undermine growth in coming quarters especially as factories have already started cutting output.
India's $2 trillion economy picked up pace between July to September compared to the previous three months, growing 7.3 percent against expectations of 7.5 percent expansion in a Reuters poll, official data showed on Wednesday.
But cooling price pressures, as reflected in the latest PMI where both input and output price rises decelerated, may act as a temporary relief and provide room for the Reserve Bank of India to cut interest rates further.
"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," De Lima said.
Indian consumer inflation eased for a third straight month in October to 4.2 percent, helped by smaller rises in food prices.