India’s manufacturing sector expanded at a higher-than-expected rate in February, backed by strong domestic orders, according to the HSBC India Manufacturing Purchasing Managers' Index (PMI) prepared by Markit.

The HSBC India Manufacturing PMI -- a composite indicator that gauges the factory output and operating conditions in the manufacturing sector -- showed that the country posted a reading of 54.2 in February, up from 53.2 in January.

The index has remained above 50 -- indicating growth -- for almost four years. The data showed that the manufacturing activity was boosted by an increase in new domestic orders and an increase in factory output, indicating a quick recovery, but the index was below the long-run series average.

"Manufacturing activity picked up on the back of stronger growth in domestic orders. Together with some replenishment of inventories, this lifted growth in output and purchases,” Leif Eskesen, chief economist for India at HSBC said.

Output rose for the 47th month while export orders registered growth in the month, in line with the strong demand from foreign clients, but the total export business grew at the slowest pace in six months.

“The pace of growth was solid, and faster than that seen in January. Almost 35 percent of monitored companies signaled increased output at their units, while 17 percent registered a fall,” the survey said.

Pre- and post-production inventories at manufacturers increased in February. Strong new orders increased the inventory, although the accumulation rate was moderate, while power outages lead to rise in backlogs of work during the month, the survey said.

The official GDP figures released by the government Thursday showed that growth moderated to 4.5 in the last quarter of 2012, as the economy struggled with slow overseas demand. India presented a growth-oriented budget Feb.28 that laid more emphasis on government spending than austerity measures and slapped new taxes on the rich, analysts averred.

Asia’s third largest economy is facing the risk of sovereign downgrade to junk status as the persistent inflation is preventing the Reserve Bank of India, the Central Bank of India and the Indian government from taking drastic measures to boost growth.

The HSBC survey showed that the inflation levels edged up in February as both input and output prices picked up in the month.

“Inflation pressures, however, remain firm, with input cost inflation holding steady and inflation of output prices picking up," Eskesen stated, adding: "The numbers underscore that the room for monetary policy easing is limited, even with progress on fiscal consolidation.”

India’s wholesale price inflation at 6.62 percent in January is well above the comfort levels of the Reserve Bank of India. Although the HSBC report was not an indication of India’s inflation, the increase in input and output prices could put pressure on the headline inflation rate.

The high rate of inflation, which, according to the Reserve Bank of India, is much above its comfort levels of 5 percent, would prevent the Central Bank against easing the interest rates in its next policy review meeting.

The RBI cut its repo rate by 25 basis points to 7.75 percent in January and revised its GDP growth forecast to 5.5 percent from 5.8 percent for the fiscal year ending in March.