Services growth slowed slightly in August but exports hit record high

Growth in India's dominant services industry lost some steam in August but overall conditions remained strong despite elevated inflationary pressures, according to a business survey that showed exports were at a record high on robust foreign demand. Tuesday's findings, coupled with a sister survey on Friday which found factory growth expanded at its fastest pace in three months, suggest Asia's third-largest economy will be the fastest-growing major country despite slowing global growth. The S&P Global India Services Purchasing Managers' Index (INPMIS=ECI) fell to 60.1 in August from 62.3 in July, lower than the Reuters poll expectation of 61.0. Still, the reading was above the 50-mark separating growth from contraction for a 25th consecutive month - the longest stretch since August 2011. "This spike in international demand supported one of the best sales performances recorded over the past 13 years, and acted as a catalyst for firms to expand their workforces as well as output," noted Pollyanna De Lima, economics associate director at S&P Global. "Demand strength also fostered a heightened sense of optimism regarding the outlook, boding well for economic growth prospects."

A sub-index monitoring overall demand slowed slightly in August compared to the previous month. Although it remained strong at 60.0 it was below July's 13-year peak of 62.2. Foreign demand was its highest since the series began in September 2014. The business outlook for the next 12 months was the most robust since December, encouraging firms to hire at the fastest pace in nine months. However, inflationary pressures quickened and the prices charged index reached a peak last seen in June, even though input prices rose at a slower pace.

"Favourable demand trends also led to the joint-fastest increase in prices charged for Indian services in over six years, which may prompt attention from policymakers and potentially delay cuts to the benchmark repo rate," De Lima added.

India's inflation is expected to remain above the Reserve Bank of India's target range of 2 per cent-6 per cent until at least October. But the central bank is forecast to keep its key policy rate unchanged at 6.50 per cent til end-March, followed by a 25 basis-point cut in April-June.

Despite India's manufacturing activity expanding at a three-month high in August, slower services growth meant the overall S&P Global India Composite PMI Output Index cooled to 60.9 last month from 61.9.