The PMI came in at 53 for November, the lowest reading this fiscal year. Is this a sign that the recovery is losing steam and that the long-awaited correction in demand as a result of the drought is finally making its presence felt?

HSBC senior economist Robert Prior-Wandesforde believes that is what is happening, writing: “This may partly reflect the impact of the severe drought, which is likely to have some knock-on effects to the industrial sector...although it is noticeable that growth in exports orders also softened to 51.8 from 53.4."

Graphics: Ahmed Raza Khan / Mint

There are some signs that manufacturers are gaining pricing power, with the output price index at its highest since September 2008. That’s yet another indication of improving demand.

That expansion in demand, for the month of October, is also seen in the trade data. The y-o-y fall in non-oil imports is much lower at 17.2%, compared with a 30.4% contraction in September. It’s still a contraction, but month-on-month non-oil imports have improved. External demand also improved, with the y-o-y fall in exports at 6.6%, a much better performance than during earlier months. As the developed economies revive, exports should get back into positive territory.

At the same time, non-oil imports are still contracting, partly because of lower prices, lower capital goods imports and, perhaps, because gold imports are lower because of the high prices. But as ABN Amro senior economist Gaurav Kapur put it, “Indian manufacturing has recovered from a very sharp downturn, which is why the initial expansion has also been rapid. Going ahead, though, the pace of growth is likely to moderate."

The stock market, though, shows no signs of believing in that moderation.