Services sector activity continued to expand in December 2023, with the HSBC India services Purchasing Managers' Index (PMI) hitting a three-month high of 59.0, data released on January 5 showed.
At 59.0, the gauge of services sector activity was up from November's one-year low of 56.9 and above the key level of 50 that separates expansion in activity from contraction for the 29th month in a row.
Like the services index, the composite PMI also rose to a three-month high of 58.5 in December even though the manufacturing PMI fell to an 18-month low of 54.9 in the last month of 2023.
"India's services sector ended the year on a high note, with an uptick in business activity, led by a three-month high new orders index," noted Pranjul Bhandari, chief India economist at HSBC.
Within new orders, those from abroad continued to grow, with Indian service providers seeing higher demand in December from clients based in Australia, Canada, Europe, the Middle East, and South America. However, the rate of increase in these overseas orders was the lowest in six months.
"Services firms in India expect the strong demand momentum to carry forward to 2024 which, coupled with advertising and better customer relationships, underpinned upbeat forecasts for output. The overall degree of business optimism was strong and better than that seen in November," S&P Global, which compiles the index, said.
As new orders increased, there was continued "mild pressure" on service firms' capacities in December. Employment in the sector rose slightly, at a faster rate than in November.
On the prices front, input cost inflation for service providers fell to the lowest in 40 months in December. However, in a sign of improving corporate margins, prices charged to customers rose at a faster pace than the increase in input prices.
"The rate of increase in prices charged for the provision of services in India was solid, above its long-run average and faster than that seen for input costs. The upturn was reportedly induced by rising instances of firms passing on cost burdens to their customers," S&P Global noted.
Economists widely expect headline retail inflation to have risen further in December from 5.55 percent in November and test the upper-bound of the Reserve Bank of India's 2-6 percent tolerance range.
"We are forecasting India's December CPI inflation at 6.03 percent," said Kaushik Das, Deutsche Bank's chief economist for India and South Asia.
"The reason for the uptick is primarily an unfavourable base… If the December CPI print comes at 6.0 percent, as per our forecast, this will lead to an average of 5.5 percent in October-December 2023, 10 basis points lower than RBI's forecast of 5.6 percent. With the base effect becoming more favourable from January and as vegetable prices continue to fall during the winter months aided by the arrival of new crops, CPI inflation will likely moderate to 5.0 percent average in January-March 2024," Das added.
Inflation data for December 2023 will be released on January 12.
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