Stuck below 50: HSBC Services PMI declined in March

The RBI may be in wait-and-see mode for now as it monitors the transmission of the previous hikes in monetary policy, HSBC Services PMI says

April 03, 2014 11:20 IST | India Infoline News Service
The HSBC Services PMI pointed to a weakening in activity and business flows in March. Meanwhile, business confidence improved on the back of rising hopes that economic conditions would improve going ahead. Inflation cooled, with both input price and prices charged rising at a slower clip. However, the softening in inflation may not continue as upside risks remain. The RBI will probably remain in a wait-and-see mode for now to monitor the lagged impact from previous tightening and if inflation risks materialize or not. However, we may not have reached the end of the tightening cycle yet.


Business activity (47.5 vs. 48.8 in February) and new business flows (47.6 vs. 49.5 in February) fell further.
However, business expectations (66.0 vs. 63.4 in February) rose notably.
The composite output index for services and manufacturing (48.9 vs. 50.3 in February) slipped below 50.
Outstanding business (52.2 vs. 48.2 in February) rose and employment (51.2 vs. 50.1 in February) picked up.
Inflation eased with the index for input prices (53.2 vs. 53.9 in February) and prices charged (51.2 vs. 52.0 in February) declining.

Activity in the services sector weakened further due to the difficult economic climate. Panelists blamed upcoming elections as part of the reason for weaker demand. At the same time, firms have turned more optimistic in the hope that the economy will improve going forward.

However, there are several issues that constrain services sector growth in the near term, including lingering structural constraints and tighter monetary and fiscal policies. Moreover, the high leverage of corporates and deteriorating asset quality in the banking sector is also a constraining factor. There was evidence of some distress among service sector firms in the PMI survey, with panelists reporting an increase in work backlogs partly due to delays in the receipt of outstanding payments.

Inflation pressures have moderated in services, but firms still face significant increases in input costs. Panelists noted increases in labor, fuel and raw material costs. Moreover, the outlook for inflation has deteriorated somewhat recently. Some of the risks, also highlighted by RBI in its latest monetary policy statement, include weaker monsoons due to El Nino effects, adjustments in minimum support prices for agricultural products, changes in other administered prices, uncertainty about the fiscal outlook, and the potential impact of geopolitical tensions on international commodity prices.

Going forward, the RBI may be in wait-and-see mode for now as it monitors the transmission of the previous hikes in monetary policy and keeps an eye on 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% and lower from January 2016, monetary policy has to be tighter than it is now. How much further it would need to tighten would depend on the pace of fiscal consolidation and supply-side reform progress.

PMIs indicate a further weakening in services activity, although business expectations are improving as firms are hoping for improved economic conditions going ahead, possibly post-elections. Price pressures have eased, but firms continue to see significant input cost increases. The RBI will probably stay pat on policy rates for now as it monitors inflation risks.

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