Services PMI contracts for second straight month in October on muted demand

Anecdotal evidence highlighted subdued demand conditions, competitive pressures and a fragile economic situation

Activity in India's dominant services industry contracted for a second consecutive month in October due to muted demand, a private business survey showed on Tuesday, driving business optimism to a near-three year low.

Although the Nikkei/IHS Markit Services Purchasing Managers' Index rose to 49.2 last month from 48.7 in September, it remained below the 50-mark threshold separating contraction from growth on a monthly basis.

The last time services activity contracted for two consecutive months was in August 2017 following the hasty implementation of a Goods and Services Tax (GST).
 

A sub-index tracking demand showed new business barely grew last month.

That, alongside a manufacturing slowdown, dragged a composite index to a more than two-year low of 49.6, pointing to further weakness in Asia's third-largest economy after growth fell to a six-year low of 5% in the April-June quarter.

"It's somewhat worrying to see the Indian service sector stuck in contraction, as firms react to muted demand by lowering business activity," said Pollyanna De Lima, principal economist at IHS Markit, in a press release.

"Perhaps even more concerning was the downward revision to future expectations, given the possible detrimental impact of subdued business confidence on investment and jobs." Optimism about the coming year faded to its lowest since December 2016 and firms increased headcount at the joint-weakest pace in over two years.

The survey findings indicate 135 basis points of interest rate cuts by the Reserve Bank of India this year and recently announced reforms by the government have so far done little to boost business activity.

Weak demand also forced firms to absorb much of a jump in input costs, which increased at the quickest pace in a year, squeezing profit margins.

"Still, this was not sufficient to generate new work and we might see selling prices being discounted in the coming months as competitive pressures build up," added De Lima.