India's manufacturing sector expanded last month due to healthy demand conditions and softer inflationary pressure, a key macro-economic data showed on Monday.

The Nikkei India Manufacturing Purchasing Managers' Index (PMI) which is a composite indicator of manufacturing performance rose to a five-month high of 52.5 in March, from 50.7 reported for February.

An index reading of above 50 indicates an overall increase in economic activity, and below 50 an overall decrease.

"PMI data for March reveal positive developments in the Indian manufacturing sector. Rates of expansion in factory orders and production accelerated again, encouraging some companies to scale up their input buying and take on additional workers," said Pollyanna De Lima, Economist at IHS Markit and author of the report.

"The favourable demand environment was supported by relatively muted inflationary pressures. Given that input costs rose at a softer pace, a whopping 96 per cent of goods producers kept their selling prices unchanged over the month."

"Looking ahead, production volumes are likely to rise further as businesses will seek to replenish their stocks. Indeed, we saw a marked drop in inventories of finished items, alongside a stronger degree of confidence towards the year-ahead outlook for output," De Lima said.

The report pointed out that the increase in total "new work" was supported by higher new export orders, which grew at a solid and accelerated pace.

Besides, the macro-economic data disclosed that intermediate goods sub-sector led the growth in overall manufacturing output.

"Out of the three broad areas of manufacturing, intermediate goods was March's shining star, as growth of new work, production and input buying in this category surpassed those seen at consumer and capital goods firms," De Lima added.

Further, the report revealed that "business confidence" among manufacturers improved in March, with almost one-fifth of panellists expecting output levels at their units to be higher in 12 months' time.

"Forecasts of a pick-up in demand and the launch of new product lines were the main factors underpinning optimism," the report said.

In addition, the macro-economic data showed that manufacturing jobs rose in March as some firms hired extra staff in line with efforts to expand capacity.