Services sector growth eases slightly but remains strong in July: PMI

Services PMI: Activity in India's dominant services sector remained robust in July, supported by strong domestic demand and job creation, despite facing elevated cost pressures that drove selling-price inflation to a seven-year high, according to a survey released on Monday.

The HSBC final India Services Purchasing Managers' Index (PMI), compiled by S&P Global, recorded a slight decline to 60.3 in July from 60.5 in June, falling short of a preliminary estimate of 61.1. Nevertheless, the index remained well above the 50-mark, which distinguishes expansion from contraction, for the 36th consecutive month. This marks the longest streak of expansion since the series began in December 2005.

"Service sector activity rose at a slightly slower pace in July, with new business increasing further, primarily driven by domestic demand. Looking ahead, services firms remained optimistic about the outlook for the year ahead," noted Pranjul Bhandari, chief India economist at HSBC.

The survey highlighted that strong demand and favourable conditions helped boost the new business sub-index. Although international demand grew at a slower rate compared to June's fastest rise in a decade, it still indicated robust demand from abroad. The new export business gauge recorded its third-highest reading since the sub-index was introduced in September 2014, with the highest readings also occurring this year in May and June.

The solid demand outlook led to a rebound in expectations for future activity, lifting the future activity sub-index from an 11-month low in June. This optimistic outlook contributed to continued strong hiring, albeit at a slightly slower pace than June's 22-month high. Companies continued to add workers to meet the increasing demand.

Generating employment, especially for the country's young population, has been a significant challenge for the Indian government. The services sector has been a key contributor to job creation, maintaining a mild but consistent pace of employment growth for over two years. To further address the issue, the government has announced plans to allocate Rs 2 lakh crore over the next five years.

The survey also noted that higher raw material and labour costs contributed to increased expenses for service providers in July, prompting companies to raise their prices at a faster rate. Selling price inflation rose significantly and was the joint-highest in seven years as firms passed on these costs to clients.

Data released last month showed that India's annual retail inflation increased in June for the first time since December, reaching 5.08 per cent, above the Reserve Bank of India's (RBI) medium-term target of 4.00 per cent. A recent Reuters survey indicated that the RBI is expected to lower its repo rate by 25 basis points to 6.25 per cent in the next quarter, although there was no consensus on the year-end interest rate.

The manufacturing index released last week also showed a slight dip, falling to 58.1 in June. Combined with the small decline in the services PMI, the overall Composite PMI dropped to 60.7 from 60.9 in June.

(With Reuters inputs)