India's dominant services activity grew at its fastest pace in a year last month, driven by an extended robust recovery in domestic demand though input costs rose at the quickest rate in eight years, a private survey showed.
Asia's third largest economy came out of a technical recession and expanded 0.4% annually last quarter and the recovery is widely expected to gather pace in the year ahead amid hopes a successful vaccine rollout will boost business activity.
The Nikkei/IHS Markit Services Purchasing Managers' Index rose to 55.3 last month from 52.8 in January, its highest since February 2020, just before the coronavirus pandemic hit the economy.
It has stayed above the 50-level mark separating growth from contraction for the fifth straight month as a sub-index tracking new business orders hit a year high. The positive impulse came despite a persistent contraction in foreign demand, albeit the pace of the downturn was the slowest since March 2020.
"Economic activity is generally expected to recover in the final quarter of fiscal year 2020/21 after coming out of technical recession in (fiscal) Q3, and the latest improvement in the PMI indicators points to a strong expansion in the fourth quarter should growth momentum be sustained in March," said Pollyanna De Lima, economics associate director at IHS Markit.
The economic rebound and the solid recovery in manufacturing activity helped boost the composite PMI to a four-month high of 57.3 in February.
Still, services firms reduced headcount at the sharpest pace in three months, signalling the bruised labour market will take more time to fully recover.
Firms faced the strongest increase in input costs in eight years but were unable to transfer it on to customers as they tried to maintain their market share and stimulate new orders.
That along with a recent spike in oil prices - a key component of headline inflation - mean overall price pressures are likely to intensify, making it difficult for the Reserve Bank of India to remain so accommodative.
"Again, inflation remains a topic of concern," said De Lima. "Once firms' additional cost burdens start to feed through to clients via price hikes, demand strength may come under pressure."
However, optimism was at a 12-month high last month, driven by the ongoing economic recovery and hopes for a successful vaccine rollout.