India’s services growth defies inflation pressures

The S&P Global India services Purchasing Managers’ Index fell to 61.2 in May from 62.0 in April, but outstripped the Reuters poll expectation of 60.0.

That marked the longest streak of expansion in almost 12 years with the index above the 50-mark that separates growth from expansion for 22 months.

The services sector accounts for more than 50% of India’s gross domestic product. Asia’s third-largest economy expanded 6.1% in the March quarter, one of the fastest growing emerging markets.

This was despite the Reserve Bank of India (RBI) raising interest rates by 250 basis points since May last year, in a bid to cap inflation, which has held above the central bank’s 2%-6% target range for most of 2022.

The survey showed input costs rose last month at the fastest pace this year and firms passed on the burden to customers at the quickest rate since November’s over five-year peak.”Inflationary pressures continued to pose a challenge for service providers, with panelists noting rising costs for food, inputs, labour and transportation,” said Pollyanna De Lima, economics associate director at S&P Global Market Intelligence.”Faced with the delicate task of balancing these increases and maintaining affordable prices for consumers, firms opted to lift selling prices again in May.”

But inflationary pressures did little to dampen demand, which has remained sturdy with the new business sub-index easing slightly from April’s near 13-year high. International demand rose for a fourth consecutive month and at the highest pace this year.

The future activity sub-index, which measures optimism, was also strong, with growth slowing just a tad from April.

To meet growing demand firms continued to add headcount, stretching the current sequence of hiring to a year. Though only mild, the rate of job creation was the highest this year.

“With policymakers closely monitoring inflation developments, long-waited cuts to interest rates – which could aid business strategies, budgeting and investment plans – appear more distant,” added De Lima.

Inflation in India has been within the target range for two months and economists expect interest rates to stay on hold this year.

The overall S&P Global India Composite PMI Output Index stayed at April’s almost 13-year high of 61.6 as the manufacturing sector expanded at its fastest pace since October 2020.