India’s service sector shows strong performance in May; firms sanguine about 1-year outlook

Service sector activity in India showed strong performance in the month of May as it expanded at the fastest clip in last three months largely because of significant increase in new work orders. According to the data compiled by Markit, the HSBC Business Activity Index, which measures the service sector activity in the nation, bounced from 52.8 in April to a three-month high of 54.7 in May. A figure above 50 signals increase in production while, a number below 50 indicates decrease in production.

The resilient performance in the country’s service sector was due to continued rise in new business growth and a strong expansion of new orders. The data also highlighted that though the rate of jobs growth remained marginal, employment in service sector continued to increase. Service providers were more sanguine about one-year outlook, which is evident since the index measuring business expectations zoomed to a 15-month high of 76.7 in May from 73.8 in April, more than 14 points above its March level.

However, inflation remained a cause of concern as input price inflation in the sector climbed to a strong rate while the rise in output prices too was sharp, the highest in four months, and higher than the long-run trend. Nevertheless, the data spurred some respite as it was quite opposite to the government’s recently released fourth quarter gross domestic product (GDP) growth numbers which underscored that Asia's third largest economy expanded at its slowest annual pace in almost nine years.

Moreover, the HSBC Composite Output Index, which encompasses both manufacturing and service sectors’ activity, ascended to 55.3 in May, from 53.8 in the previous month largely because of sharp rise in services PMI and steady manufacturing PMI. Amid increasing speculations that the Reserve Bank of India in its mid-quarter policy review on June 18 would take some policy action to bring India’s deteriorating economy out of doldrums, these PMI numbers emphasize on the fact that there is little room for aggressive monetary policy easing over the near term.