India April HSBC Composite PMI at 48.5 vs 47.5 in March

Despite the slight uptick in April, the PMIs indicate continued softness in services activity.

May 06, 2014 12:09 IST | India Infoline News Service
HSBC's services sector PMI improved in April, but the reading for both activity and new business flows remained below 50. The weak growth backdrop is the result of the lingering structural constraints, which may only be lifted very gradually after the elections. Inflation picked up with both input price and prices charged rising at a faster pace. Inflation risks, including from the probability of an adverse food supply impact from the El Nino, is likely to keep the RBI in a hawkish mode.


-Business activity (48.5 vs. 47.5 in March) and new business flows (48.4 vs. 47.6 in March) continued to contract in April, albeit more slowly.

- Meanwhile, business expectations (65.8 vs. 66.0 in March) eased slightly.

-The composite output index for services and manufacturing (49.5 vs. 48.9 in March) improved.

- Outstanding business (52.1 vs. 52.2 in March) growth was broadly unchanged and employment (49.8 vs. 51.2 in March) dipped below 50.

-Inflation rose with both input prices (53.9 vs. 53.2 in March) and prices charged (52.6 vs. 51.2 in March) accelerating. Surveyed companies indicated that fuel, food, packaging materials and paper costs had all risen.

Activity in the services sector remains subdued with the PMI reading for new business and output cruising below the water line for the past several months. Upcoming elections are partly to blame for the weaker demand, but deeper rooted fundamental weaknesses are the main culprit for the soft growth backdrop.

A new government can bring about change, but not overnight. Any recovery will prove very protracted. Tighter monetary and fiscal policies needed to address macro-economic imbalances will pose headwinds near term. Moreover, high corporate leverage and a deterioration of banks' asset quality are also constraining factors. Finally, structural constraints are still in place and it will take time to tackle these, even for a government with a strong mandate and the political will to instigate change.

Inflation pressures also remain firmly in place and there are risks on the horizon. The potential for higher international commodity prices due to higher geopolitical risks and the likely adverse impact of the El Nino on food supply are key near term risks. Moreover, inflation expectations remain sticky after years of high and volatile inflation. Finally, underlying inflation pressures are kept alive due to the lack of slack, which have resulted from the supply-side led slowdown in the economy.

In light of this, the RBI is unlikely to abandon its hawkish stance. It will likely stay in wait-and-see mode for a while longer as it monitors the transmission of the previous hikes in monetary policy and the extent to which the upside risks to inflation materialize or not. However, this does not mean that we have hereby reached the end of the tightening cycle. If the RBI wants to bring inflation down to 6% by January 2016, monetary policy has to be tighter than it is now. How much more it would need to tighten would, however, depend on the pace of fiscal consolidation and supply-side reform progress post elections.

Bottom line: Despite the slight uptick in April, the PMIs indicate continued softness in services activity. Moreover, price pressures have increased. Coupled with inflation risks on the horizon, the RBI will have to continue its staring contest with inflation and make sure that it doesn't blink.

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