The Nikkei Manufacturing Purchasing Managers' Index, compiled by Markit, fell to 50.7 in October from September's 51.2. The 50-mark divides expansion from contraction.
A sub-index covering new orders dropped to a two-year low of 51.2 from 52.5 as the uncertain economic climate deterred clients from committing to new projects, Markit said. New export orders grew slightly faster than September but at a modest pace, and levels were still well below those in late summer.
To try and spur demand, the Reserve Bank of India cut interest rates to a 4-1/2 year low of 6.75 percent in September in a larger than expected move. A Reuters poll had forecast a 25 basis point (bps) reduction to 7.00 per cent.
The central bank has cut interest rates by 125 bps since January, but as input prices rebounded in October the RBI will likely remain on the sidelines for the remainder of the year watching for any signs of a pick-up in inflation.
"The RBI may pause its loosening cycle for the rest of the year. Upcoming survey data will show how effective the central bank's effort to revive the economy has been," said Pollyanna De Lima, an economist at Markit.
With the RBI likely to hold fire, pressure has mounted on Prime Minister Narendra Modi, who has promised to fast-track stalled infrastructure projects and ease restrictions on firms to bolster growth.
Still, showing some signs of optimism, firms added workers last month for the first time since January, though the increase was marginal.
© Thomson Reuters 2015