April services PMI improves but still in negative region

The lingering structural constraints and the weak demand due to the polls have tied the April services PMI in the negative territory, though it is a marginal improvement from the previous month.
"The services PMI improved in April, but the reading for both activity and new business flows remained below 50. The weak growth backdrop is the result of the lingering structural constraints, which may only be lifted very gradually after the elections," HSBC chief economist for India and Asean Leif Eskesen said in a note today.
Activity in the services sector remains subdued with the PMI reading for new business and output cruising below the water line for the past several months. Ongoing elections are partly to blame for the weaker demand, but deeper rooted fundamental weaknesses are the main culprit for the soft growth backdrop, he said.

Business activity rose to 48.5 in April from 47.5 in March, while new business flows rose to 48.4 from 47.6, but continued to contract in April, albeit more slowly, he said, adding business expectations marginally declined to 65.8 from 66 in March.
The composite output index for services and manufacturing improved to 49.5 from 48.9 in March, while outstanding business dipped a notch to 52.1 from 52.2 and employment levels dipped to 49.8 from 51.2 in March.
He further said inflation both in input and retail prices rose at a faster pace in the previous month. Inflation risks, including from the probability of an adverse food supply impact from the El Nino, is likely to keep the RBI in a hawkish mode.

Inflation rose with both input prices (53.9 vs. 53.2 in March) and prices charged (52.6 vs. 51.2 in March) accelerating led though prices of fuel, food, packaging materials and paper costs fell in the month.
Other constraining factors are the high corporate leverage and a deterioration of banks' asset quality. On inflation he warned that risks from a potential higher international commodity prices due to higher geopolitical risks and the likely adverse impact of the El Nino on food supply are key near-term risks.
"In light of this, RBI is unlikely to abandon its hawkish stance. It will likely stay in wait-and-see mode for a while longer as it monitors the transmission of the previous hikes and the extent to which the upside risks to inflation materialise or not," he said.