India's Services Sector BOOMS: November PMI Soars on Strong Demand, But Global Headwinds Emerge!

India's dominant services sector demonstrated accelerated growth in November, with the HSBC India Services Purchasing Managers' Index (PMI) climbing to 59.8. This uptick was primarily fueled by strong domestic demand and a significant increase in new business. However, the sector faced headwinds as export sales growth dipped to an eight-month low amid intensifying global competition.

The latest survey data indicates a vibrant domestic services economy, with new business intakes expanding at a pace faster than the long-run average. This robust internal demand suggests resilience in consumer spending and business activity within India.

The manufacturing and export-oriented segments, however, presented a different picture. New export orders saw their slowest expansion since March, a clear sign that Indian service providers are struggling against strong international competition and the availability of cheaper alternatives in other markets. This divergence highlights a key challenge for India's overall economic growth strategy.

A significant positive development was the sharp decline in input cost inflation, which fell to its lowest point since August 2020. This moderation, despite marginal increases in specific expenses like food and electricity, allowed service providers to implement only negligible price hikes. The inflation rate for services charged was the weakest in over four years.

This benign inflation outlook provides strong support for market expectations that the Reserve Bank of India (RBI) may proceed with a 25 basis points interest rate cut during its upcoming policy meeting this week. Lower borrowing costs could further stimulate economic activity.

Despite the overall increase in output, the job market showed limited improvement. Approximately 95% of surveyed firms reported no change in their payroll numbers, indicating that current expansion is not yet translating into significant job creation. Furthermore, business confidence regarding the 12-month outlook slipped to its lowest point since July 2022, with firms expressing caution over competitive pressures and global economic uncertainties. The broader HSBC India Composite PMI, which includes both manufacturing and services, also eased, reflecting slower overall growth.

Key Numbers or Data

• HSBC India Services PMI rose to 59.8 in November, up from 58.9 in October.
• The reading has stayed above the 50-mark (indicating growth) for 52 consecutive months.
• New business intakes grew faster than the long-run average.
• New export orders expanded at the slowest pace since March.
• Input cost inflation retreated to its lowest level since August 2020.
• Prices charged for services showed the weakest inflation rate in over four years.
• Around 95% of firms reported no change in payroll numbers.

Market Reaction

• The reduction in input cost inflation and controlled price hikes strengthen the likelihood of a monetary policy easing by the Reserve Bank of India.
• Expectations are high for a 25 basis points rate cut this week, which could positively influence borrowing costs and investor sentiment towards equities.

Background Details

• The Indian services sector has maintained a consistent growth trajectory, remaining above the 50-point threshold for 52 consecutive months, demonstrating sustained economic expansion.
• This performance underpins India's position as a rapidly growing major economy.

Future Expectations

• Business confidence regarding the 12-month outlook has declined to its lowest point since July 2022, signaling caution among firms about future competitive pressures and market conditions.

Risks or Concerns

• Intensifying global competition poses a significant challenge to export sales growth for Indian service providers.
• The modest pace of employment growth suggests that economic expansion is not yet creating substantial job opportunities.
• Declining business confidence could potentially dampen future investment and expansion plans.

Impact

• The acceleration in the services sector and moderating inflation could lead to a favourable interest rate environment, boosting corporate profitability and stock valuations.
• However, challenges in export markets could limit growth for export-oriented companies.
• Impact Rating: 7/10

Difficult Terms Explained

• PMI (Purchasing Managers' Index): A survey-based economic indicator that measures the health of the services (or manufacturing) sector. A reading above 50 indicates expansion, while a reading below 50 suggests contraction.
• Input Cost Inflation: The rate at which the prices of raw materials, components, and services used by businesses to produce their goods or services increase.
• Basis Points: A unit of measure used in finance to describe the smallest change in a percentage. One basis point is equal to 0.01% (1/100th of a percent). Therefore, 25 basis points equal 0.25%.