India: Services Downturn Gathers Speed in March

Activity in India's services sector reported an increased rate of shrinkage over March as new business dropped, according to a survey. But Indian companies increased headcount to execute a small order backlog.

The HSBC Services Purchasing Managers' Index (PMI), compiled by Markit, dropped to a three-month low of 47.5 in March from 48.8 in the preceding month, chalking up its ninth straight month below the 50-threshold, which officially denotes expansion.

New business fell at a faster pace. The sub-index hovered at 47.6 in March from February's 49.5.

However, firms hired more staff for the fourth month after building up a small amount of outstanding business and were the most optimistic about the future than they have been since July 2013.

That optimism could be in anticipation that month-long general elections, which kick-off on 7 April, would bring in a new government led by the opposition Bharatiya Janata Party, which is thought to be more business-friendly.

"Following some stabilisation in recent months, service sector activity [in India] weakened again in March led by softer domestic demand," said Leif Eskesen, chief economist for India & ASEAN at HSBC.

"Growth is expected to remain subdued in coming months, but pick up gradually during the second half of 2014. This, however, assumes that the election outcome provides the elected government with a workable mandate," Eskesen said.

Earlier in the week, a separate HSBC survey showed that Indian manufacturing activity grew at a slower pace in March amid weak domestic demand.

RBI Policy

The Reserve Bank of India (RBI) left its policy rate unchanged this month after inflation eased and governor Raghuram Rajan cited a downward risk to his growth estimate of 5% to 6% for the April 2014-March 2015 fiscal year.

Stubbornly high inflation has compelled India's central bank to raise interest rates three times since September 2013, although price pressures eased in February.