Growth in services activity picked up in Feb, inflation pressure predicted

Growth in India's dominant services industry picked up less than expected in February despite an easing of COVID-19 restrictions, a private survey showed, while price pressures led firms to shed jobs at the quickest pace since July.

Those inflationary effects will likely intensify as the survey was conducted before Russia's invasion of Ukraine, which is driving a surge in oil prices - India's biggest import.

The Services Purchasing Managers' Index, compiled by IHS Markit, increased to 51.8 in February from January's six-month low of 51.5.

Although above the 50-mark that separates growth from contraction for a seventh month, it was well short of the 53.0 expected in a Reuters poll. "Growth in the service sector failed to rebound as meaningfully as many would have hoped given that COVID-19 cases receded considerably from January's new wave and restrictions were lifted," noted Pollyanna De Lima, economics associate director at IHS Markit.

"Looking at the anecdotal evidence supplied by survey participants, inflationary pressures, input shortages and the local elections dampened growth."

Although new business expanded at a slightly quicker pace in February, it remained tepid. Foreign demand marked two years in contractionary territory and last month's rate of decline was the sharpest since September.

That suggests Asia's third-largest economy, which lost momentum last quarter, might struggle to regain its stride. Meanwhile, services firms reduced their workforces for a third month and the rate of layoffs was the quickest in seven months.

Despite a slower rate of increase in input prices compared to January, inflationary pressures remained elevated and firms were only able to transfer a small portion of that burden onto customers. Prices charged rose at the weakest rate in five months.

Surging inflation on one hand and rising uncertainties over the economic impact of the Russia-Ukraine crisis on the other might make it difficult for the Reserve Bank of India to decide on policy.

"Business optimism among services firms remained muted relative to its trend, despite improving from January, owing to pandemic-related uncertainty and inflationary pressures," added De Lima.

Still, an improvement in services activity and an acceleration in manufacturing growth meant the composite index increased to 53.5 in February from 53.0 in January.

(Reporting by Indradip Ghosh; Editing by Kim Coghill)