India’s service PMI falls to 2-year low at 49.1 in October

03 Nov 2011 Evaluate

India’s service sector Purchasing Managers’ Index (PMI) moderated for the second successive month in October, as new business grew at its slowest pace since May 2009, on the back of slowdown in the global economy and tight monetary policy. The seasonally adjusted HSBC Markit Business Activity Index declined to 49.1 in October from 49.8 in September. October’s reading is the lowest reading in last two and half years and below the 50-mark which separates growth from contraction. On the other hand, manufacturing output improved slightly from September’s 30-month low.

Commenting on India services PMI survey, Leif Eskesen, Chief Economist for India & ASEAN at HSBC said, ‘the momentum in the services sector eased further in October with business activity declining sequentially and new orders expanding at a slower clip. This reflects the lagged impact of the monetary policy tightening undertaken so far, although partly also reported strike action. By sector, the deceleration was led by financial services, renting and business services, and the broader 'other services' category.

The Reserve Bank of India (RBI), in order to control inflation, increased its key policy rates by 350 basis points or 3.5% since March 2010, which has increased the interest rates hence the cost of capital. However, headline inflation measured by Wholesale Price Index (WPI) has been hovering around two digit mark, for September inflation stood at 9.72% compared to 9.78% in August.

‘On the inflation front, there was some relief with both prices charged and input costs rising less rapidly, although the former are still climbing fast by historical standards. The numbers confirm some re-balancing between growth and inflation risks, supporting RBI's decision to signal a pause in the near term,’ Leif Eskesen said.

However, banks have been slow on passing the interest rate increase to borrowers, in a bid to help businesses which is worried that the debt crises in Europe which is one of the important export destination. However, in spite of slowdown in western economies, the survey showed that Indian service providers were more optimistic regarding coming year than last month as business expectations saw a rebound.

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