Services sector still in expansionary mode

New Delhi: India's services sector activity continued to expand in September, supported by favourable underlying demand amid the easing of Covid-19 restrictions, but lost some momentum from August's 18-month high level, a monthly survey by IHS Markit India Services PMI showed on Tuesday.

The seasonally adjusted India Services Business Activity Index fell from 56.7 in August to 55.2 in September, but remained well above its long-run average.

"Despite easing from August, the rate of expansion was marked and the second-fastest since February 2020," the survey said.

Buoyed by signs of improvements in underlying demand, Indian service providers took on additional staff during September. The increase in employment ended a nine month sequence of job shedding, but was marginal overall as some panellists indicated having sufficient workforces to deal with their workloads. For the second straight month, the services sector witnessed an expansion in output.

In Purchasing Managers' Index (PMI) parlance, a print above 50 means expansion, while a score below 50 denotes contraction. "Indian companies continued to benefit from a recovery in demand as the pandemic receded further and restrictions were lifted. The improved market environment meant that firms managed to secure new work and increase business activity during September," said Pollyanna De Lima, Economics Associate Director at IHS Markit. However, despite the sustained recovery of the sector, business confidence weakened in September.

"While forecasts of better demand in the year ahead supported business confidence regarding output, growth looks set to be constrained by rising inflation expectations. We saw a substantial decline in positive sentiment among service providers due to this factor, despite input cost inflation retreating in September," Lima said.

Moreover, travel restrictions continued to weigh on international demand for Indian services. New export business contracted for the nineteenth month in a row, the survey said. Business Activity in India's private sector rose further in September, as both manufacturing and services output continued to expand. The Composite PMI Output Index -- which measures combined services and manufacturing output -- was at 55.3 in September, little-changed from 55.4 in August. On the prices front, amid reports of higher fuel, material, retail and transportation prices, average cost burdens faced by Indian service providers rose further during September. The overall rate of inflation was "solid", but softened to an eight-month low. Economists believe the Reserve Bank of India is expected to continue with the accommodative policy stance in its October 6-8 monetary policy discussions. On the macro-economic front, subdued prices of food items like vegetables pulled down retail inflation for the third month in a row to 5.3 per cent in August, within the RBI's comfort zone. Retail inflation, which rose sharply to 6.3 per cent in May from 4.23 per cent in April, has been on a downward trajectory since then. It was 6.26 per cent in June and 5.59 per cent in July this year.