Reserve Bank of India to cut interest rates

Services sector grew at its fastest pace in over three-and-half years on surge in domestic and overseas orders, but prices remained subdued leaving room for RBI to cut interest rates, a monthly survey showed on Monday.

 The trend in job market remained muted due to uncertainty regarding the sustainability of the upturn in demand. The Nikkei India Services Purchasing Managers' Index (PMI), which tracks changes in activity at services sector companies on a monthly basis, stood at 54.7 in August, up from 51.9 in July.

This marks an uptrend for 14th straight month. A reading above 50 means the sector is expanding, while a reading below that level means contraction. "Service sector showed upbeat levels of performance in August. New business was the main driver of activity growth, even amid increased competition for new work," Pollyanna De Lima, economist at IHS Markit, and author of the report said. 

The level of incoming new work rose at the quickest pace in three-and-a-half years and companies mainly linked this to improved market conditions. With growth of manufacturing production also ticking higher, the Nikkei India Composite PMI Output Index, climbed from 52.4 in July to a 42-month high of 54.6 in August, highlighting a stronger improvement in private sector economic activity.

Meanwhile, the trend in employment remained comparatively subdued, however, with a slight decrease in jobs signalled for the first time since September last year. "The numbers of in-house staff fell, however, as firms remained somewhat uncertain regarding the sustainability of the upturn in demand," Lima said, adding a further uptick in backlogs may lead service providers to create jobs in coming months. Stronger business activity growth and incoming new work led to modest recovery in optimism at service providers. 

Over 27 per cent of companies expect activity to increase over the coming year. "Healthy levels of confidence were also signalled, with firms expecting greater client interest and improved market conditions to underpin output growth in the year ahead. All-in-all, PMI data suggest that the service sector looks set to maintain its strong performance in the months ahead," Lima said. 

On prices front, the survey noted inflationary pressures in service sector remained subdued in August. Average costs declined marginally for a second successive month, which firms attributed to lower diesel, fuel and vegetable prices. Meanwhile, average service charges ticked higher. The easing of inflationary pressures leaves room for rate cut by RBI, which is scheduled to hold its next monetary policy review probably the first by a new committee being set up on October 4.

 It would also be the first review under the new RBI Governor Urjit Patel, who has assumed charge effective September 4 after end of his predecessor Raghuram Rajan's three-year tenure. Rajan had faced a lot of criticism for his reluctance to cut rates, though he always maintained that the rates were lowered at every given opportunity.