In a significant upturn, services sector grew at its fastest pace in three months in July on surge in new business orders and low prices, a monthly survey showed on Wednesday, raising hopes for a rate cut by RBI Governor Raghuram Rajan in his last monetary policy review next week.
The cut in prices showed that the inflationary pressure was muted, while job creation continues to remain subdued, leaving room for a parting gift from the outgoing RBI Governor in form of a reduction in interest rates to boost growth.
The Nikkei India Services Purchasing Managers’ Index (PMI), which tracks changes in activity at services sector companies on a monthly basis, increased to 51.9 in July, up from 50.3 in June.
“The Indian service economy started the second semester on a solid footing, posting its strongest performance since April and thereby indicating that underlying demand conditions remained reasonably firm,” said Pollyanna De Lima, economist at Markit, which compiles the survey.
With growth of manufacturing output also quickening, the seasonally adjusted Nikkei India Composite PMI Output Index climbed to a three-month high of 52.4 in July, as against 51.1 in June.
A reading above 50 means the sector is expanding, while a reading below 50 means contraction. Earlier on Monday, the PMI survey for manufacturing sector showed that the country’s factory output grew at its fastest pace in four months, which was also driven by surge in new business orders though pricing trends and job creation remained muted.
Lima, however, said growth remains below-par when compared with the long-run survey trend and, although expansion has been sustained for 13 consecutive months, the sector has so far failed to generate jobs.
Employment was broadly unchanged in manufacturing as well as service sectors during July, as indicated by the respective indices recording levels just fractionally above the crucial 50.0 threshold.
It has now been over two-and-a-half years since the private sector has seen meaningful job creation, as per the survey. On inflation, Lima said, “Service providers signalled declining price pressures, with output charges being cut in line with an overall decrease in input costs.”
Experts believe subdued inflationary pressures may prompt the Reserve Bank to cut key policy rates in the upcoming monetary policy review meeting on August 9. It is likely to be Rajan’s last monetary policy before he leaves RBI on September 4.
In its policy review meet in June, Rajan kept interest rates intact, citing rising inflationary pressure, but hinted at a reduction later this year if good monsoon helps ease inflation, though industry has been demanding a cut. The industry is still hopeful of further rate reduction from the apex bank to boost investment.