Services sector grows fastest since October 2016 to 54.2 in July: PMI

Price pressures, among other factors, to keep central bank on toes

Unlike manufacturing, the services sector expanded at a 21-month high in July, showed widely-tracked purchasing managers' index (PMI), justifying the Reserve Bank of India's (RBI's) move to hike the policy rate to contain inflation.    

In fact, price pressures remain in July even after moderating from June, and the author of the report states the pressure on the central bank to hike the rate in the coming months. High services growth led to companies jacking up their hiring levels, the fastest since April. 

The PMI rose from 52.6 in June to 54.2 in July, as new businesses rose at the fastest rise since June 2017. Before this, the PMI was at its peak at 54.5 in October 2016.    

In PMI parlance, a figure above 50 means expansion, while a score below that denotes contraction.

"(This is) indicative of excellent expansion in business activity and optimism in India," said economic affairs secretary Subhash Garg. 

The sector, which dominates India's economy, rose even as manufacturing growth slowed down in July, according to PMI. The index for manufacturing was down at 52.3 in July, from 53.1 in June. 

As a result, the headline seasonally-adjusted Nikkei India Composite PMI Output Index, which maps both the manufacturing and services sector, rose from 53.3 in June to 54.1 in July.

"July (services) data was encouraging as the services sector observed the best performance since October 2016, underpinned by the strongest gain in new orders since June 2017," said Aashna Dodhia, economist at IHS Markit and author of the report.

Amid reports of improved demand conditions, business confidence towards the 12-month outlook picked up from June's recent low. Subsequently, firms raised their staffing levels at the strongest pace since April.

On the price front, inflationary pressures remained marked during July.

"There are some warning signs reflected by PMI price data. Although overall input cost inflation softened from June's near four-year high, service companies faced the fastest rise in input costs since March, amid reports of high oil prices," Dodhia said.

On the RBI's policy stance, Dodhia said, "Indeed, an uncertain global climate, currency weakness, and strong inflation may continue to place pressure on the central bank to hike interest rates over the coming months." 

The six-member Monetary Policy Committee (MPC), headed by Governor Urjit Patel, for the second time in two months raised interest rates by 0.25 per cent on inflationary concerns.