BENGALURU India's factory activity expanded at the slowest pace in five months in September but remained solid, with strong demand driving business confidence to its highest level this year, despite increased inflationary pressures, a private survey showed.

The Manufacturing Purchasing Managers' Index, compiled by S&P Global, fell to 57.5 last month from 58.6 in August, missing the Reuters poll forecast for 58.1.

That marked the 27th straight month of the index being above the 50-mark separating expansion from contraction.

"India's manufacturing industry showed mild signs of a slowdown in September, primarily due to a softer increase in new orders which tempered production growth," said Pollyanna De Lima, economics associate director at S&P Global Market Intelligence.

"Nevertheless, both demand and output saw significant upticks, and firms also noted gains in new business from clients across Asia, Europe, North America and the Middle East."

New orders and output rose sharply despite the sub-indexes easing from August, driven by both domestic and foreign demand. International demand grew for the 18th month in a row.

That bolstered optimism and pushed business confidence to a nine-month high.

It also prompted firms to increase headcount. The employment index was the highest since November and has been above 50 for six consecutive months although the rate of expansion remained moderate.

Input costs rose mildly in September - at the weakest pace in over three years - as participants noted lower prices for aluminium and oil.

However, strong demand spurred companies to raise their selling prices. The output charges index rose, driven by higher labour costs, and the rate of increase was above its long-run average, indicating more inflation worries.

"The solid increase in output charges signalled by the PMI data, which occurred in spite of a notable retreat in cost pressures, could restrict sales in the coming months," added De Lima.

Inflation in India eased in August to 6.83% from July's 15-month high of 7.44% but remained above the Reserve Bank of India's (RBI) target range of 2%-6%, keeping policymakers watchful.

The RBI was not expected to raise its key repo rate again this year and its next move will be a cut of 25 basis points to 6.25% in the second quarter of 2024, a Reuters poll predicted.

(Reporting by Shaloo Shrivastava; Editing by Kim Coghill)