A Tad More Perky- HSBC India services PMI inched up in October

Visit http://indiaer.blogspot.com/ for complete details �� �


A Tad More Perky
HSBC India services PMI inched up in October
Following a deceleration in the pace of expansion recently, Indian service sector activity perked up in October. This
helped raise employment in the sector, but was accompanied by a slower expansion in new business and some easing
of price pressures. However, with the economy close to potential and the outlook for domestic demand still favorable,
underlying price pressures remain. In turn, this calls for further monetary tightening to clamp down on the sticky-high
inflation. Look for RBI to resume tightening in early-2011 following yesterday's 25bps hike and simultaneous signaling
of a pause.




Facts
HSBC's India PMI for service sector activity rose marginally in October (56.2 vs. 55.6 in September (Chart 1)). This follows a
deceleration in the pace of expansion since this summer. New business continued to grow, but a slower pace than the previous
month (53.3 vs. 54 in September) and well-below the break-neck pace seen earlier in the year when the cyclical recovery from
the global economic crisis was at an earlier and less mature stage.
Nevertheless, the uptick in activity in October encouraged businesses to increase employment (51.4 vs. 50.3 in September
(Chart 2)), which together with improved efficiency (according to anecdotal evidence) likely helped them reduce their
outstanding business (48.4 vs. 49.8 in September).
Input prices climbed on a sequential basis (Chart 3), but at a more moderate pace (53.8 vs. 55.6 in September). Prices charged,
on the other hand, declined (49.4 vs. 51.9 in September), with anecdotal evidence pointing to limited pricing power due to
strong competition.
Overall, businesses remained optimistic about the outlook, although confidence has receded over the past few months and is
below the long-term average (68.8 vs. 70.3 in September).
Interpretation
With service sector activity still in expansionary territory and employment rising, there is clear evidence that end-demand in
India is robust. The October uptick in the growth momentum is further evidence of this, but it is, of course, just one data point
and it may not necessarily signify a turning point with a reacceleration in service sector growth. Also, it is to be expected that
sequential growth will be somewhat constrained considering the sharp cyclical rebound in activity since the depth of the global
economic crisis last year, which very quickly brought the economy close to its potential.
That being said, services will continue to face "tail winds" from strong domestic demand. Impetus to domestic demand is, as
highlighted in previous notes, expected to come from a further improvement in labor market conditions (both employment
and wages), the unfolding positive implications from the favorable monsoon on agricultural output and incomes, and the
still highly accommodative monetary policy stance. Together with the corporate sector's need to expand capacity through
investment, the loose monetary conditions are expected to support credit growth and financial intermediation more generally.
Furthermore, services in general will benefit from the strong momentum in manufacturing, which also has its roots in the
vibrant domestic demand conditions. Finally, the approach of the festive season is going to keep sprits high and the purse
strings loose.