India's manufacturing sector activities witnessed the strongest rate of growth in three months in July amid improved demand conditions and easing of some local COVID-19 restrictions, a monthly survey said on Monday.

The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers' Index (PMI) rose from 48.1 in June to 55.3 in July, pointing to the strongest rate of growth in three months.

In PMI parlance, a print above 50 means expansion while a score below 50 denotes contraction.

"It's encouraging to see the Indian manufacturing industry recover from the blip seen in June. Output rose at a robust pace, with over one-third of companies noting a monthly expansion in production, amid a rebound in new business and the easing of some local COVID-19 restrictions," said Pollyanna De Lima, Economics Associate Director at IHS Markit.

Lima further noted that "should the pandemic continue to recede, we expect a 9.7 per cent annual increase in industrial production for calendar year 2021."

On the recruitment front, there was a marginal increase in employment in July that ended a 15-month sequence of job shedding.

"Although marginal, the rise in employment was the first since the onset of COVID-19. With firms' cost burdens continuing to rise, however, and signs of spare capacity still evident, it's too early to say that such a trend will be sustained in coming months," Lima said.

On the inflation front, there was a softer but still sharp increase in input costs. Output charges rose only slightly, however, as several companies absorbed additional cost burdens amid efforts to boost sales.

"Policymakers will welcome evidence that inflationary pressures are starting to abate. Firms signalled the slowest increases in input costs and output charges for seven months.

"Hence, we expect the RBI to keep interest rates unchanged in its August meeting as it continues to support growth," Lima said.

The RBI is scheduled to announce its bi-monthly monetary policy review on August 6 at the end of the three-day meeting -- August 4-6 -- of its Monetary Policy Committee (MPC).

Experts believe, amid fears of a third wave of coronavirus pandemic and hardening of retail inflation, the Reserve Bank is likely to maintain status quo on interest rate and watch the developing macroeconomic situation for some more time before taking any decisive action on monetary policy.

The survey further noted that, Indian firms foresee output growth in the year ahead, with the end of the pandemic and rising sales expected to support the upturn.

"The overall level of positive sentiment rose from June's 11-month low, but remained historically subdued as some companies were concerned about the path of the pandemic," the survey said.