According to the Nikkei India Manufacturing Purchasing Managers' Index (PMI), the composite indicator of manufacturing performance declined to a three-month low of 51.7, from 52.3 in July and 53.1 in June.
An index reading of above 50 indicates an overall increase in economic activity, or growth, and below 50 an overall decrease.
Commenting on the Indian manufacturing PMI survey data, Aashna Dodhia, Economist at IHS Markit and author of the report, said: "Indian manufacturers retained positive projections for output over the next 12 months, but the level of sentiment eased in August.
"Indeed, some of the key headwinds facing the economy include high global oil prices, monetary policy tightening and capital outflows from emerging markets."
Although sub-indices tracking output and total orders touched three-month lows last month, foreign demand rose at the quickest pace since February despite global trade tensions.
"PMI data suggested that external demand for Indian goods was also robust, with new export orders rising at the fastest pace since February," Dodhia said.
"Following rises in domestic interest rates, manufacturing companies gained some breathing space as input cost inflation moderated to the weakest since May and further from June's multi-year peak.
"That said, the rupee depreciation against the US dollar continued to place strong upward pressures on input prices," she added.
The Indian rupee reversed all the gains made earlier on Monday to close at an all-time low of 71.21 per dollar, tracking a weak trend among its global peers amid concerns of a wider trade deficit for the country.
An upswing in manufacturing activity and revival of private investment, supported by strong consumer demand, accelerated India's GDP growth rate in the first quarter (April-June) to 8.2 per cent, official data showed last week.
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