The PMI, released by the global banking major HSBC today, is arrived at after a poll of 500 purchase managers and is widely regarded for its accuracy, moved up to 54.2 from 51, on higher demand both from domestic as well as foreign clients.

"Activity in the manufacturing sector rebounded in December led by higher demand from both domestic and foreign clients, suggesting that the momentum in the sector is not quite as weak as official and more dated IP data would suggest," HSBC chief economist for India and Asean Leif Eskesen said in the report.

The official IIP (index of industrial production) has been suggesting a bleak picture for some successive months now. Data released last month showed a 5.1 per cent contraction in the IIP numbers in October, its slowest since March 2009.

The successive rate hikes by the Reserve Bank and weak macroeconomic conditions domestically and globally were being blamed for the contraction.

Meanwhile, for the 33rd month in a row, manufacturers said there has been a rise in new businesses in December, leading the growth in output to reach a four-month high, the HSBC report said.

As a consequence, manufacturing sector employment has also increased slightly during the month, ending a period of job losses that had set in in August, the survey pointed out.

On the input front, costs went up on higher prices of raw materials and fuel, it said, adding with higher demand, manufacturers were also able to pass on the costs.

Alarmed by the fall in industrial activity and the impact it can have on overall growth, RBI had in its last statement indicated that it will reverse on the rate tightening stance.