June service PMI rises on surge in new business

Indian service sector is gaining momentum with the sharp increase in new business received during June, attributing this to ongoing improvements in general market conditions and a strengthening of demand. The increase in new orders received by manufacturers was substantial, but slowed to the weakest in six months.

The seasonally adjusted HSBC Markit Business Activity Index, based on the survey of 400 companies, which cover the business activities, increased to 56.1 in June from 55.0 in May. However, the expansion in service sector activities was not enough to cover the slowdown in the rate of output growth at manufacturing, which was hampered by the lower increase in new orders, labour shortages and power cuts.

It is the 26th straight month that the index has stayed above the 50 mark that divides growth from contraction. Participating companies in the survey were optimistic for the improvement in growth in new business over the next year because of marketing initiatives. The service sector index reached its highest level in June since February.

The employment sub index saw moderation in June because of shortages in suitable labor, however, new jobs continued to be created to deal with the growth in business. Input prices continued to increase but at the slower pace, whereas consumers also witnessed moderation in prices. Both the input prices and prices charged index fell to 7 month low level.

Leif Eskesen, Chief Economist for India & ASEAN at HSBC said, “Services are showing signs of resilience, with business activity and new business improving over the previous month, despite policy tightening and high inflation. While input costs and prices charged grew at a slightly slower pace, inflation pressures remain significant and persistent. The Reserve Bank of India (RBI), therefore, has little choice but to continue its tightening cycle.”

Last month, the RBI hiked its policy rates for the 10th time from March 2010; to reduce the inflation to its comfort zone, however, headline inflation measured by the wholesale price index has remained at elevated level from last few months. In May the headline inflation was stood at 9.06% from 8.66% in April. The PMI for Indian manufacturing sector fell to nine-month low level in June, indicating the stubborn inflation and tight monetary policy hurting the pace of growth.