India's services activity bounced back in July and expanded at the fastest pace in a year after contracting the previous month, driven largely by strong growth in international demand, a private survey showed on Monday. The IHS Markit Services Purchasing Managers' Index rose to a one year high of 53.8 in July, up from 49.6 in June and comfortably above the 50-mark that separates growth from contraction.
"India's service economy showed renewed vigor in July as businesses and households welcome the recent government budget announcement," Pollyanna De Lima, principal economist at IHS Markit, said. "Encouragingly, service providers reported a widespread improvement in demand, from the public and private sectors as well as domestic and international markets." A sub-index tracking overall demand showed new orders increased at the quickest pace in nearly three years, driven largely by foreign demand which expanded at the fastest pace since IHS began to measure it in September 2014.
The surge in demand, along with increased optimism about new business over the coming year, prompted firms to increase hiring at the fastest pace since March 2011. "Ongoing expansions in the employment base should support household spending and consumer confidence in the near-term," De Lima said. Although input costs rose at the quickest pace in five months, firms did not pass all of these to consumers and output prices rose at a slower rate.
That suggests inflation is likely to remain below the Reserve Bank of India's medium-term target of 4% in coming months, underscoring expectations for another interest rate cut by the RBI when it meets on August 7. The sharp expansion in both services and manufacturing activity pushed a composite index to an eight-month high of 53.9 in July, from 50.8 the previous month.