January service sector index hits 3-month low

India's services sector activity fell to a three-month low amidst subdued growth in new orders, a key macro-economic data showed on Thursday.

The Nikkei Business Activity index fell to a three-month low of 51.4 in February, from 54.3 in January, adding to expectations of a rate cut by the Reserve Bank of India following the union budget for 2016-17 maintaining the fiscal deficit targets for this fiscal and the next, earlier this week.

An index reading of above 50 indicates an overall increase in the economic activity, below 50 an overall decrease.

The survey said although new services orders continued to rise in February, the rate of expansion eased to the weakest since November 2015, as firms faced strong competition for new work during the month.

Instead, the Nikkei India Composite PMI Output index, which tracks both manufacturing and services sectors, fell to 51.2 in February, from January's 11-month high of 53.3.

"India's economic growth softened during February, with slowdown evident across both manufacturing and service sectors," said Pollyanna De Lima, economist at Markit, which compiles the survey.

"Demand conditions in the country appear to be weak, as indicated by lacklustre increase in new orders," De Lima said.

"Although PMI data still signal expansion in output and incoming new work, recent figures are considerably low by historical standards," she added.

Survey respondents' confidence on the 12-month outlook for business activity remained positive, although sentiment waned since January.

On the possibility of a Reserve Bank rate cut, De Lima said falling price pressures and global economic challenges may open up room for a dovish policy.

"One centrepiece of the latest survey result is evidence of fading inflationary pressures which combined with a stuttering recovery and an increasingly challenging global backdrop open up room for a rate cut," De Lima said.

At its sixth and the fiscal's final bi-monthly monetary policy review last month, the RBI kept its key lending rate unchanged at 6.75 percent.

"The Reserve Bank continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on inflation," RBI Governor Raghuram Rajan said in his policy statement.

India's consumer price indexed (CPI), or retail, inflation has been rising. As per data released last month, annual retail inflation moved up further to 5.69 percent in January, from 5.61 percent in the month before.

A seasonal softening in food prices and a sharp drop in fuel costs caused India's annual wholesale rate of inflation to decline marginally to (-)0.90 percent for January from (-)0.73 percent for the month before, official data showed last month.