India May services PMI declines to 61.2, but activity remains robust

This is the 22nd consecutive month in which India's services Purchasing Managers' Index, or PMI, has come in above 50.

India's services activity remained robust in May even though the sector's Purchasing Managers' Index (PMI) declined to 61.2 from 62.0 in April, according to data released by S&P Global on June 5.

At 61.2, the May services PMI is the second-highest print in just under 13 years. It has also stayed above the key level of 50 that separates expansion in activity from a contraction for 22 months in a row.

The PMI is a survey-based indicator based on the responses of around 400 service companies. The sectors it covers includes non-retail consumer services, transport, information, communication, finance, insurance, real estate, and business services. An index is calculated for each sector, all of which are then combined to give an overall PMI figure.

Given that the PMI measures change in activity from the previous month and is seasonally adjusted, it is seen as a good indicator of the momentum in economic activity. Further, it is the most immediately available data point – the PMI for any given month, both for the services and manufacturing sectors, is released in the first week of the subsequent month.

In comparison, official data on economic activity – such as the Index of Industrial Production or the index of eight core industries – are released with a lag of a month or more. As such, PMI data is seen as a lead indicator of the state of the economy and policymakers often rely on it to inform their decisions.

The latest services PMI data comes days after S&P Global said the manufacturing PMI rose to a 31-month high of 58.7 in May. As a result, the composite PMI, which is a combination of the manufacturing and services indices, was unchanged from April's 61.6 - highest since July 2010.

Source: S&P Global

"The PMI data for May stand as a compelling testament to prevailing demand resilience, impressive output growth and job creation within India's dynamic service sector," noted Pollyanna De Lima, economics associate director at S&P Global Market Intelligence.

The PMI numbers are the latest in a series of solid indicators of India's activity levels. On May 31, data from the statistics ministry showed India's GDP grew by a better-than-expected 6.1 percent in January-March.

While the headline PMI number was lower in May compared to April, new business for service providers rose again, although at a softer pace than the previous month. Foreign demand, on the other hand, increased for the fourth straight month and at the fastest pace in 2023.

India's services exports have been booming, with latest Balance of Payments data showing that in October-December, the services trade surplus rose to a record $38.7 billion from $34.4 billion in July-September.

The rise in new business had a positive impact on employment, with firms hiring extra workers, S&P Global said. This resulted in service sector employment rising, albeit only slightly. However, the rise in employment in May was the fastest so far in 2023.

Price situation

While there was good news on the business and jobs front, prices continued to rise.

According to S&P Global's survey, service providers witnessed a rise in food, input, transportation, and wage costs in May, with the overall input price level increasing at the fastest pace since December.

"Worryingly, the survey showed the joint-fastest upturn in output charges for nearly six years," De Lima noted.

"With policymakers closely monitoring inflation developments, long-waited cuts to interest rates — which could aid business strategies, budgeting and investment plans — appear more distant," she added.

India's headline retail inflation rate crashed to an 18-month low of 4.70 percent in April thanks to a favourable base effect and is expected to fall even closer to the Reserve Bank of India's (RBI) medium-term target of 4 percent when data for May is released on June 12.

However, before that, the Indian central bank's Monetary Policy Committee (MPC) will announce its latest interest rate decision. Scheduled to be released  on June 8, the MPC's decision is likely to be a repeat of what happened in April, with the committee choosing to leave the repo rate unchanged at 6.5 percent.