A reading above 50 represents expansion while one below this level means contraction.
"Signs of challenging economic conditions in the Indian manufacturing sector were evident in May, with output losing further growth momentum. The headline PMI remained in expansion territory, but recorded one of its lowest readings since the end of 2013, suggesting that the sector is barely improving," Pollyanna De Lima, Economist at Markit and author of the report, said.
New orders expand but at a "slight pace" and was mostly driven by the domestic market, while new business from abroad falls for first time since September 2013.
"Although new orders rose further, the rate of expansion was well below the long-run survey average and new business from abroad, in fact, declined," Lima added.
As per the survey, subdued demand and an increasingly competitive environment appears to have restricted pricing power among goods producers, as output charges were raised only marginally despite cost inflation climbing to a 14-month high.
"So far, there is little evidence that the latest cut in the benchmark rate acted to significantly improve business conditions for manufacturers. Therefore, further stimulus may be necessary to shift the economy into a higher gear," Lima said.
Earlier in April, the RBI cut its policy rate by 0.25% to 6.5%. While this was the first rate cut after a gap of six months, the RBI has lowered its rate by 1.5% cumulatively since January 2015.
However, the industry still wants further rate cuts from the apex bank to boost investment.
Meanwhile, the Indian economy grew at 7.9% in the fourth quarter of 2015-16 taking the overall GDP growth to a five-year high of 7.6% in the fiscal.
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