May Sees Service Activity Growth Dip To 5-Month Low Of 60.2: PMI

Even though the new business sub-index, an essential measure of demand, retained its strength in May, it experienced its most sluggish growth of the year

As strong domestic demand faded, India's services activity growth fell to a five-month low in May, according to a survey that also showed record-breaking export growth and job creation reaching a 21-month high. Confounding a preliminary reading anticipating an increase to 61.4, the final HSBC India Services purchasing managers' index, produced by S&P Global, dropped to 60.2 last month from 60.8 in April.

Nevertheless, it sustained its position above the threshold of 50, which delineates the boundary between expansion and decline, marking the continuation of this trend for the 34th consecutive month.

"India's service activity rose at a slightly softer pace in May, with domestic new orders easing slightly, but remaining robust, implying strong demand conditions and successful advertising," said Maitreyi Das, global economist at HSBC.

Even though the new business sub-index, an essential measure of demand, retained its strength in May, it experienced its most sluggish growth of the year. This was attributed to intense competition and nationwide heat waves that adversely affected economic activity.

Nevertheless, exports surged at their most pronounced rate since the sub-index was incorporated into the monthly survey nearly ten years ago. With indications of recovery emerging in China and economic resilience evident in the US, the recent upturn in global demand may persist. 

Robust sales pushed the business outlook for the upcoming 12 months to reach an eight-month peak, prompting services firms to increase hiring at the quickest rate since August 2022.

However, last month saw an escalation in price pressures compared to April, as input costs surpassed their long-term average, and prices charged also experienced a slight increase.

"Cost pressures ticked up in May led by higher raw material and labour costs. Firms were only able to transfer a part of the price rise to customers," added Das.

This could potentially initiate a resurgence in inflation, which has predominantly subsided throughout the year, thereby increasing the likelihood that the Reserve Bank of India will maintain interest rates at their current levels for an extended duration, with a probable cut anticipated in the October-December quarter as opposed to the previously expected timeframe of July-September. 

As both manufacturing and services sectors experienced a slight easing in business activity during May, the overall HSBC India composite PMI output index declined to a five-month low of 60.5 last month, down from April's 61.5 and below a preliminary estimate of 61.7.

The new government elected on June 4 will likely prioritise the sustained growth of both services and factory activity to ensure that India maintains its position as the fastest-growing major economy in the coming years. India outperformed expectations by achieving a growth rate of 7.8 per cent in the last quarter.