HSBC's India service PMI bounces in May

India Infoline News Service | Mumbai |

The election result should add further strength to the recovery, but don't expect soaring growth. The RBI could yet hike one more time.

There's still a long way to go, but we're heading in the right direction. HSBC's service PMI for India rose above 50 for the first time in eleven months. The election put extra wind into India's sails. New business orders are up as well. However, don't get too carried away. The PMI is barely in expansion mode. What's more, India's economy will be able to tolerate only a gradual pick-up in growth. Otherwise, inflation will rear its head again. Yes, the RBI sounded dovish yesterday, but it simply extended a welcoming hand to Mr Modi. If price pressures accelerate again, which seems possible, rates may have to go higher.
Facts
Business activity (50.2 vs. 48.5 in April) and new business flows (50.5 vs. 48.4 in April) were above 50 for the first time in eleven months.
Meanwhile, business expectations (65.8 vs. 65.8 in April) were unchanged.
The composite output index for services and manufacturing (50.7 vs. 49.5 in April) rose above 50.
Outstanding business (53.6 vs. 52.1 in April) rose, but employment (49.9 vs. 49.8 in April) hardly changed.
Encouragingly, inflation eased for both input prices (52.7 vs. 53.9 in April) and prices charged (50.9 vs. 52.6 in April). Surveyed companies indicated that they paid more for fuel and raw materials.
Implications
Activity in the services sector is improving gradually. Fortunately, the boost to sentiment from the strong election result will further drive up activity in the sector. However, it is important to be realistic about the pace at which the economy can turn around. After all, the required reforms will take time to get through the political machinery and deliver the desired results.
A notable pick-up in growth may only arrive by the middle of next year on the back of the implementation of investment projects, improving domestic sentiment and firming external demand. Therefore, the speed with which the economy recovers is likely to disappoint expectations with growth predicted to recover to 5.3% in FY2015 against 4.7% in the current fiscal year. Having said this, the medium-term prospects for the country are certainly brighter than they were a month ago.
Despite the easing of price pressures noted by PMIs, elevated risks to headline CPI inflation underline the persistent challenges facing the RBI in attaining price stability. However, the RBI surprised markets yesterday by turning dovish. Officials seem fairly confident that foreseeable inflation risks will be addressed by strong policies from the new government. We think a rate hike may be warranted if government policies are unable to address these risks.
Bottom line: PMIs indicate a gradual improvement in services activity, with the index creeping above the 50 level after nearly a year. The election result should add further strength to the recovery, but don't expect soaring growth. The RBI could yet hike one more time.
 

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