India's output of the crucial manufacturing sector largely maintained its momentum in May even as domestic orders slowed, a survey by HSBC showed on Friday.

The purchasing managers’ index (PMI) slipped marginally to 54.8 in May from 54.9 in April, HSBC Holdings Plc and Markit Economics said in a statement.

It has stayed above the 50 mark, that separates growth from contraction, for a little over three years now.

The survey's output index rose to 56.4 in May from 56.1 in April, while the employment sub-index rose to its highest level in ten months.

"Activity in the manufacturing sector kept up the pace in May with output, quantity of purchases and employment expanding at a faster pace. New orders decelerated slightly, led by domestic orders," said Leif Eskesen, economist at HSBC.

Prices continued to rise but the pace of price increases moderated slightly from April.

"Inflation is still high by historical standards. In light of these numbers, the RBI does not have a strong case for further rate cuts, which if implemented could add to lingering inflation risks," added Eskesen.

The HSBC-Markit PMI survey showed that new export orders continued to grow at a strong pace in May, despite mounting economic and political uncertainties in Europe.

The new orders to inventory ratio fell to 1.16 in May from 1.20 in April, which suggests there may be a further fall in the PMI reading next month.

In May, the fall was mainly driven by lower domestic demand, with new orders falling to 59.6 from 61.1 in April.

"Despite the weak global growth outlook, export new orders remained unchanged at 56.2 in May, likely due to rupee depreciation," say Nomura India economists Sonal Varma and Aman Mohunta.

Power and labour shortages remain a bottleneck and as such, the backlog of work index remained elevated, they said in a research note.

Meanwhile, the input price index (64.2 in May from 64.8 in April) and the output price index (57.8 from 58.7) eased in May, but remained above their historical averages.

There is a growing divergence between the PMI and real activity data.

While the March IIP (and Q1 GDP) data suggest that the economic slump has worsened, the PMI data suggests that though momentum gained in Q1 is fading in Q2, activity levels are higher than in H2 2011.

"Meanwhile, the USD-INR depreciation is supporting exports, even as it is offsetting the benefits of lower commodity prices and a sub-potential growth," Nomura India says.

As such, inflation remains sticky, it adds.