Service companies suffer worst slump in over 4 years

Activity at Indian services companies shrank at the fastest pace in more than four years last month, suggesting the slowdown in Asia's third-largest economy still has some way to run, a survey showed on Friday.

The HSBC Services Purchasing Managers' Index (PMI), compiled by Markit, slipped from 47.6 in August to 44.6 in September, its weakest since April 2009.

That marked its straight third reading below 50, the threshold between growth and contraction.

It showed firms were less optimistic about the future and were cutting staff as new business dries up.

The PMI also capped the worst quarter for the Indian services sector - which accounts for nearly 60 per cent of the economy - in more than four years, stoking fears that growth in the three months to September will be weaker than April through June.

India's economy grew just 4.4 per cent in the quarter to June, its weakest quarterly pace since the first three months of 2009.

"Service sector activity contracted further in September ... as tighter financial conditions and heightened macroeconomic uncertainty weighed on growth," said Leif Eskesen, chief economist for India at survey sponsor HSBC.

The PMI's new business index fell to 45.0 in September from 46.6 in August, the weakest reading since February 2009 and the third month running that demand has declined.

Such weak demand augurs poorly for coming months, too.

An HSBC Markit manufacturing survey released on Tuesday showed factory activity shrank for a second month in September.

Adding to economic woes, a ballooning current account deficit has driven funds out of the country, hurting the Indian rupee and pushing the Reserve Bank of India (RBI) to adopt measures which effectively drained cash from the market.

Those moves raised funding costs for banks and companies, creating a ripple effect that has crimped investment.

The weaker currency also pushed wholesale inflation to a six-month high in August, prompting RBI Governor Raghuram Rajan's surprise repo rate hike of 25 basis points to 7.50 per cent on September 20.

"Despite the weak growth backdrop, inflation readings held broadly steady. This, in turn, supports RBI's stepped up efforts to better anchor inflation expectations," said Eskesen.

However, economists in a Reuters poll taken last week were split over whether Rajan will hike rates again at the central bank's next policy review on October 29.

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