The HSBC India Manufacturing Purchasing Managers' Index (PMI) - a measure of factory production - stood at 51.4 in January, up from 50.7 in December, the highest reading since March 2013.
India's manufacturing sector activity expanded for the third consecutive month in January. A PMI reading of above 50 differentiates growth from contraction.
"Manufacturing activity moved into higher gear led my faster growth in new orders," HSBC Chief Economist for India & ASEAN Leif Eskesen said.
According to HSBC, new orders expanded in January at the quickest rate in ten months, with stronger demand from both domestic as well as overseas clients.
Meanwhile, employment rate rose for the fourth straight month in January, with all three broad areas of the manufacturing segment creating jobs, HSBC said.
On the inflation front, the report said the average input costs rose in January. Consequently, companies also raised their output costs.
"...inflation pressures also firmed, suggesting that the RBI has to keep up its inflation guards," Eskesen said.
Reserve Bank Governor Raghuram Rajan raised the key policy rate by 0.25 per cent to 8 per cent in the third quarter review of monetary policy in a bid to curb inflation.
The central bank lowered its growth forecast for the current financial year to less than 5 per cent from its earlier forecast of 5 per cent and said inflation will continue to hover around 8 per cent by March-end.
Retail or CPI inflation in December moderated to a three-month low of 9.87 per cent, while the wholesale or WPI was at 5-month low of 6.16 per cent during the month.