Service sector activity expands at slightly slower pace in June

04 Jul 2012 Evaluate

Service sector activity in India expanded in the month of June, but at a rate that was slightly lower than previous month levels. Nevertheless, the sector extended its growth momentum for the eighth consecutive month thanks largely to the strong output increase as order book volumes continued to expand. The service sector report has come after manufacturing activity survey released on July 2, 2012 showed that manufacturing sector business conditions improved at fastest rate in four months, highlighting the fact that the Indian private sector output registered strong growth in June, 2012.

According to the seasonally adjusted HSBC Business Activity Index, the service sector activity grew at a marginally slower pace of 54.3 in June, as against 54.7 in the previous month. A figure above 50 signals increase in production while, a number below 50 indicates contraction. Though the service sector growth in the month under review remained lower, however the purchasing managers' index (PMI) reading, which measures the overall health of the sector, suggested that strong domestic consumption helped order books fill at their strongest pace in four months.

Though rise in new orders are likely to hold up activity in coming months, however falling demand from India's traditional overseas trading partners like the United States and the European Union could dampen future growth prospects of Indian companies. Besides, employment in the service sector too rose in the month, marking a four-month sequence of expansion. Despite being below the long-run average for this series, the increase in payroll numbers was the strongest since June 2011, while the rate of job creation at manufacturers also accelerated.

But the rate of input cost inflation remained stagnant at elevated levels as it hardly budged from previous month levels. The output price inflation remained stubbornly above the long-run series average in the services sector as it has risen each month since November 2010. Meanwhile, service sector business expectations remained optimistic, although the level of optimism dipped to the lowest since March, sentiment was still above the long-run series average.

Thus, the strong Manufacturing and Service sector PMI have propelled the HSBC Composite Index, which covers both the manufacturing and service sectors, to 55.7 in June, higher from 55.3 seen in May 2012. However, the HSBC survey further indicated that looking at the recent economic indicators and current scenario of high inflationary pressure, there was no room for the Reserve Bank of India to employ further monetary easing measures. Indian central bank had left key interest rates unchanged in its recent monetary policy review meet on June 18 after slashing the repo and reverse rates by 50 basis points each in its previous policy review meet.

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