Services activity rises back in September; optimism improves to the highest in over nine years

A substantial increase in new business coupled with sharp output growth pushed services activity higher in September, with sentiment improving to its highest level in over nine years.

The seasonally adjusted S&P Global India Services PMI Business Activity Index rose to 61 in September compared with 60.1 in the previous month, according to private survey data released on Thursday. A value of over 50 denotes expansion.

"The latest PMI results brought more positive news for India's service economy, with September seeing business activity and new work intakes rising to one of the greatest extents in over 13 years,” said Pollyanna De Lima, Economics Associate Director, S&P Global Market Intelligence, which conducted the survey.

The 400 service firms surveyed forecasted healthy market dynamics and buoyant demand for the year ahead, reflecting optimism that service activity will support growth in the coming months.

Services was one of the primary drivers of GDP in the first quarter, with the economy registering a 7.8% growth.

The Reserve Bank of India expects the Indian economy to grow 6.5% in FY24. World Bank, in its latest update, kept India’s forecast unchanged at 6.3%, expecting services activity to expand 7.4% this fiscal.

“Besides the rise in total sales, firms noted an upturn in demand from abroad, particularly from clients based in Asia, Europe and North America,” the S&P note stated.

India’s estimated services exports in the April-August period at $133.4 billion were 5% higher than the previous year, according to data released by the government last month.

Improving optimism also contributed to rising employment in the sector as firms recruited additional staff.

“Additional staff were recruited to aid firms' efforts to keep on top of current workloads and in anticipation of further growth in the coming months. The overall pace of job creation was moderate but above its long-run average,” the release stated.

On the inflation front, while cost pressures eased in September, better pricing power ensured that some companies decided to pass on costs to the consumers. The rate of output inflation was the softest in six months.

“Where expenses rose, panellists reported having paid more for chicken, rice, vegetables and transportation. There were also mentions of higher staff costs,” it said.

Experts indicate that inflation likely eased in September following two months of above 6% print.

“Worries about potential fluctuations in food prices due to El Niño means the RBI is highly unlikely to cut rates until early next year,” De Lima said.

The Reserve Bank of India’s Monetary Policy Committee is expected to keep the policy rate unchanged at 6.5% for the fourth consecutive time.