India's services sector expanded in Jan: PMI data

Financial intermediation remains a drag; with inflation under control, HSBC economist expects RBI to cut policy rate by 75 bps in 2015

The services sector, which dominates India’s economy, in January expanded at a faster rate than in the previous month, the widely tracked HSBC Purchasing Managers’ Index (PMI) showed on Wednesday. The expansion was in spite of a reduction in financial intermediation.

Meanwhile, a day after the Reserve Bank of India (RBI) decided to maintain the status quo on the repo rate in its monetary policy review, the indicative numbers in the PMI data (for the services and manufacturing sectors) showed the inflation rate had stood at a modest level in the month. A commentator on PMI expected RBI to cut the rate by 75 basis points in 2015. He, however, cautioned the central bank not to cut the rate beyond that, as an expected pick-up in economic growth might drive inflation.

Services PMI rose to 52.4 points in January from 51.1 the previous month. A reading above 50 denotes expansion, while one below that level implies contraction. Though the index was at a higher level than in December, it remained below that in November.

In January, the services and manufacturing indices moved in different directions. The manufacturing PMI, data for which were released on Monday, declined to 52.9 points in the month from a two-year high of 54.5 in December. The manufacturing index, however, still remains at a higher level than the services one.

The composite output PMI output index of the manufacturing and services sectors rose to 53.3 points in January from 52.9 the previous month.

The PMI data assume more importance because official advance gross domestic product (GDP) numbers for 2014-15 and for the first three quarters, on the basis of a revised methodology and base year, are to be released on Monday. PMI, however, differs from official numbers, as the former takes month-on-month variation and is based on a survey, while the latter is a year-on-year exercise and has a comprehensive assessment of the economy.

Respondents to the PMI survey reported sustained growth of new business in January, extending the current sequence of expansion to nine months. This was attributed to a solid demand in the economy and new marketing initiatives, said Markit Economics, which compiled the data.

“The services PMI for January was marked by faster expansions in activities and new orders,” said Pranjul Bhandari, HSBC’s chief India economist.

However, the fact that financial intermediation declined in January might have a bearing on credit growth.

Despite an increase in services activities, jobs rose only fractionally in the month. The case with the manufacturing sector was similar.

Backlog of work rose for a fourth straight month in January, and faster than the previous month. The PMI survey on services, based on some 350 private-sector companies, revealed the respondents were the most upbeat about the outlook due to improvement in demand conditions and market initiatives.

Both cost and output inflation in the services and manufacturing sectors faced pressure and rose but were still subdued when compared with historical trends, said Markit Economics. “We expect RBI to cut rates by a total of 75 basis points in 2015, but no further as latent inflation pressures could pick up when growth sees a meaningful lift,” Bhandari said.

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