PMI rose to 51.7 points in June from 50.7 in the previous month. A reading above 50 shows expansion, while one below it reflects contraction.
Earlier, official figures showed that growth in output of eight major infrastructure industries fell to a five-month low of 2.8 per cent in May against a four-year high of 8.5 per cent in April.
According to Markit Economics, a compiler of PMI data, manufacturers increased production at a faster rate in June, helped by an increase in new business inflows.
The favourable operating environment encouraged businesses to purchase additional inputs. Growth in new orders and output, both of which reached three-month highs in June, contributed to the upward movement in PMI
Incoming new work rose across the three broad areas of the manufacturing economy, so did production. The best-performing category was consumer goods.
At 50.9 points, the average PMI in the first quarter of FY17 was lower than 51.7 points in the first quarter of FY16. It was also lower than the 51.5 seen in the January-March quarter of 2016.
"Indian factories registered a welcome upturn in growth of both production and new orders mid-way through 2016, but producers remain stuck in low gear. Rates of expansion remain weak by historical standards,"said Pollyanna De Lima, an economist with Markit.
Offsetting the decline seen in May, new export orders increased in June for the first time in 32 months.
Official data showed merchandise exports fell for18 months through May though the rate of contraction came down to 0.79 per cent, the lowest in one and a half years.
The data also showed the rate of expansion in exports was marginal and below the long-run series average but it was the quickest in the current six-month sequence of increases. Two of the three monitored market groups showed higher levels of new business from abroad, barring intermediate goods.
Markit Economics said buying levels rose in June, boosted by sustained growth of order books.
The data implied the upturn in levels placed pressure on the capacity of vendors, as average delivery times lengthened to the greatest extent since April.
June saw input costs increase for the ninth month, with survey participants reporting higher prices for metals, chemicals, plastics, textiles, petrol, food and paper. The rate of inflation eased to the slowest since March, and was moderate overall.
Factory gate charges were broadly unchanged in June.
"Purchasing cost inflation softened, while selling prices were broadly unchanged. This lack of inflationary pressures provides RBI with a leeway to boost economic growth through cutting its benchmark rate," the economist at Markit said.
The next monetary policy review is in August. The monetary policy committee, comprising of government and RBI appointees with the governor as head, is expected to replace the existing mechanism of setting the policy rate. The industry is hopeful of rate reduction to boost investment.
The economy had grown by 7.9 per cent in the fourth quarter of FY16, taking the overall growth to a five-year high of 7.6 per cent.
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