The Indian manufacturing sector expanded month-on-month in January, according to the HSBC Markit Purchasing Managers' Index. And yet, the Sensex and the Nifty are down 12% in January. Are investors overreacting to fears of interest rate hikes and a possible slowdown?

The HSBC Markit Purchasing Managers' Index (PMI) for January shows expansion of the Indian manufacturing sector. However, during the same month, the Sensex and the Nifty had fallen by 11%.

Even on Tuesday after the PMI data release, the markets fell by 1.7%. Are investors overreacting?

The HSBC Markit PMI increased to 56.8 in January from 56.7 in December 2010. On the other hand, during January, the Sensex closed at 18,237.8 points from 20,561.1 points while the Nifty ended at 5505.9 points, from 6157.6 points-a fall of 11% for both indices.

The PMI, a survey of executives in over 500 manufacturing companies, portrays the true growth of the manufacturing sector, unlike government-oriented indicators that are often revised-confusing readers and analysts.

The January reading of 56.8 is the 22nd consecutive month that manufacturing in India has been above 50 (a reading below 50 implies contraction). It implies that new businesses received by Indian manufacturers increased substantially during the month in review.

Besides, the latest rise in new orders was faster than in the previous survey period and in line with the historical average for the series. While growth of new export business slowed to the weakest in three months, it has now been maintained for 20 successive months and remained above the long-run trend.

Even the output of the six core infrastructure industries-crude oil, petroleum refinery products, coal, electricity, cement and finished steel-grew by a healthy 6.6% in December 2010, an indicator that the Indian economy is on a firm wicket.

The 6.6% growth charted in December 2010 is significantly higher than the 3% expansion recorded in the previous month and is expected to lift the Index of Industrial Production (IIP) numbers for December.

India's gross fiscal deficit shrunk to Rs1.7 trillion, down almost 40% year-on-year (y-o-y), helped by higher tax collections and lower government spending. It looks like the Centre is bent on refraining from spending the incremental revenues it had received from the spectrum license sale and the recent IPO proceeds from the stake sale in a few public sector behemoths. This has resulted in high government balances (that stood at Rs640 billion as on 14th January).  

While the numbers mentioned in different indices are showing growth signs, the stock markets, however, are not following the pattern. India, on a macro scale, is witnessing deterioration. There are issues like rising food inflation, bank graft problems, slowdown in execution of projects due to stricter environmental clearances, rising deficit and political stalemate over scams, that may be affecting markets.

Despite substantial growth of both new business and output, employment in the Indian manufacturing sector was down slightly during January. The reason attributed was that demand for workers outstripped labour availability, leading to difficulties in filling up vacancies.

The month of January 2011 has been one of the worst months for the Sensex since October 2008. The benchmark has lost 2,181 points this month, wiping off most of the gains (2,303 points) made from 1 September 2010 till 31 December 2010. In the 20 trading days of January 2011, the Sensex was negative for 14 days. The advance-decline ratio on the NSE was 512:889.