Indian services activity contracts for second month in December after cash ban

Reuters - India's services industry ended 2016 on a sour note, contracting for a second month in a row in December as orders shrank amid a severe cash shortage, a private business survey showed on Wednesday.

The Nikkei/Markit Services Purchasing Managers' Index was little changed at 46.8 in December from November's 46.7. A reading below 50 indicates contraction.

A new business sub-index, an indicator of domestic and foreign demand, fell to a 39-month low of 46.0 in December from 46.7, even though firms cut prices of their goods despite input costs rising at a faster pace.

"The Indian service economy ended 2016 on a grim note, with the average PMI activity index reading for the Oct-Dec quarter the lowest since early-2014," said Pollyanna De Lima, an economist at IHS Markit.

Prime Minister Narendra Modi on Friday defended his decision to withdraw high denomination bank notes from circulation in early November, as a deadline to end severe cash shortages passed with Indians still queuing at banks to deposit savings and withdraw money.

Modi abolished 500 and 1,000 rupee bills, taking out 86 percent of cash in circulation, in a bid to fight corruption. But the move has caused major disruptions in the cash-reliant economy.

Service providers continued to remain optimistic about growth in the year ahead, but the business expectations sub-index slumped to a 12-month low.

"Business confidence among service providers plunged to one of the lowest in the series' 11-year history, suggesting that an imminent rebound from the rupee-demonetisation downturn is unlikely," De Lima said.

A sister survey on Monday showed factory growth plunged into contraction last month, with the currency crackdown hurting output and new orders.

The Reserve Bank of India unexpectedly kept its key policy rate unchanged at 6.25 percent on its December 7 meeting, despite calls for action in the face of an intense cash shortage following the demonetisation drive.

The central bank has cut rates by 175 basis points since the start of 2015 but opted to wait before judging the full effects of the currency ban.

A composite PMI, which includes both manufacturing and services, fell to 47.6 in December from 49.1, its lowest in over three years.

(Reporting By Krishna Eluri; Editing by Kim Coghill)