Country's manufacturing sector growth dipped to a three-month low in May amid softer rise in new orders and production, a monthly survey showed.
Meanwhile, muted inflationary pressure may prompt the Reserve Bank to adopt an accommodative policy stance, the survey said.
The Nikkei Markit India Manufacturing Purchasing Managers' Index (PMI) -- an indicator of manufacturing activity -- declined from 52.5 in April to a three-month low of 51.6 in May.
The Indian manufacturing sector, however, stayed in expansion mode for the fifth consecutive month in May. A reading above 50 indicates expansion, while any score below the mark means contraction.
"The upturn in the Indian manufacturing sector took a step back in May, with softer demand causing slower expansions in output and the amount of new work received by firms," said Pollyanna De Lima, Economist at IHS Markit and author of the report, adding that there was also a renewed decline in new export orders.
During May, there was "softer expansions" in both new orders and production. Incoming new work rose at the weakest pace since February, with slowdowns evident in the consumer and intermediate goods categories, while capital goods producers recorded a contraction in order books.
On price rise, the survey said that the rate of inflation softened to the slowest in eight months.
"With inflation under control and manufacturing growth below par, we may see the RBI changing neutral monetary policy stance to accommodative in coming months in order to support the economy," Lima said.
The Reserve Bank in its monetary policy review meet on April 6 kept the repurchase or repo rate -- at which it lends to banks -- unchanged at 6.25 per cent, but increased reverse repo rate to 6 per cent from 5.75 per cent.
With regards to future performance, goods producers were the most optimistic in last next six months, with firms expecting new product launches, machinery acquisitions and marketing campaigns to support output growth in the year ahead.
"Echoing a more positive tone, the PMI dataset highlighted a stronger increase in businesses' input purchasing, while optimism reached a six-month peak," Limasaid.