The Nikkei/Markit Manufacturing Purchasing Managers' Index rose to 51.8 in July from June's 51.7, marking its seventh month above the 50 level that separates growth from contraction.
"India's manufacturing economy is reviving at the beginning of the second half of 2016 after the slowdown seen in the April-June quarter, as growth in both production and new orders continued to strengthen in July," said Pollyanna De Lima, economist at survey compiler Markit.
The output and new orders sub-indexes both rose to their highest since March.
Among new orders, consumer goods saw the strongest pace of expansion, while export orders rose the fastest since January, driven largely by a depreciation in the rupee.
The survey also showed input costs rose at a modest and slower pace, although improving demand meant firms were able to pass on some of that burden.
"With inflation rates remaining lower than their respective long-run averages, it wouldn't be surprising to see the Reserve Bank of India loosening monetary policy at its August meeting in an effort to encourage investment," De Lima said.
A majority of economists polled by Reuters last month predicted a rate cut would come sometime between October and December.
That should give the government room to focus on key economic reforms such as the Goods and Services Tax bill, which promises to replace all state and federal levies with a single tax, and is currently pending in parliament.
Consumer inflation in India rose to 5.77 per cent in June, above the RBI's March 2017 target of 5 per cent, although it could cool if above-average monsoon rains help put a lid on rising food prices.
© Thomson Reuters 2016