India’s services growth slows in August on weaker demand, rising input prices

(Reuters) – India’s dominant services sector expanded at a slower pace last month than in July as weaker demand and rising input costs kept a lid on hiring, a private survey showed on Wednesday.

The Nikkei/IHS Markit Services Purchasing Managers’ Index declined to 51.5 in August from a 21-month high of 54.2 in July.

The new reading was the lowest since May but remained above the 50-mark that separates growth from contraction for a third straight month.

In August, new business expanded at the weakest rate since May, with rising price pressures dragging on overall activity, causing services firms to hire at the slowest pace since November 2017.

“Input cost inflation in the service sector accelerated to the sharpest since November 2017, fuelled by higher oil-related prices,” Aashna Dodhia, an economist at IHS Markit, said in a release.

“Meanwhile, firms faced pressure on their margins as they were unable to fully pass on higher cost burdens to price-sensitive customers.”

Firms only increased prices modestly, despite a strong increase in input costs, likely cushioning waning demand but raising the chance that overall inflation remains elevated.

Inflationary pressures, alongside strong growth – India’s economy grew 8.2 percent last quarter – may help the Reserve Bank of India remain on a track of tighter monetary policy.

Slower expansion in services activity, coupled with an unexpected decline in manufacturing growth, pushed the composite PMI to a three-month low of 51.9 in August. The July level was 54.1.

“However, amid reports of strong demand conditions, the overall economy registered in expansion territory for the sixth consecutive month, marking the longest period of growth since a 16-month sequence ended in October 2016,” added Dodhia.

“On another positive note, business sentiment towards the 12-month outlook strengthened to a three-month high, with stronger confidence seen among service providers.”