Services sector still down in January, says Nikkei study

Services sector contracted for the third consecutive month in January as business flow failed to recover from demonetisation impact, even as muted inflationary pressure raised hopes for RBI remaining "accommodative" in its rate review next week, a monthly survey showed today.

The Nikkei India Services Purchasing Managers' Index (PMI), which tracks services sector firms on a monthly basis, stood at 48.7 in January, as against 46.8 in December 2016.

A score above 50 denotes expansion and one below this level means contraction. While the index remained in the contraction zone for the third straight month, an improvement in the reading from the previous month's level signalled that the sector is heading towards stabilisation.

"India's pivotal services sector remained in contraction territory in the opening month of 2017, with both new business and activity falling for the third straight month," said Pollyanna De Lima, economist at IHS Markit, and author of the report.

The survey further showed that input cost inflation slowed since December whereas average selling prices shrank again, which may prompt the Reserve Bank to go in for an "accommodative" monetary policy.

"PMI price indicators point to relatively muted inflationary pressures in the private sector economy. As such, there is room for accommodative monetary policy," Lima said.

The Reserve Bank's next policy review is scheduled for February 8.

While the PMI index has remained in contraction zone since November, some firms pointed to improved market conditions following the close of the window for exchanging high-value banknotes.

"... a rebound in the near term is likely as rates of reduction softened and business confidence improved on the back of hopes that market conditions will soon normalise," Lima added.

Meanwhile, the seasonally adjusted Nikkei India Composite PMI Output Index rose to 49.4 in January from December's 38-month low of 47.6, pointing to a weaker contraction in private sector activity.

"What started as a downturn driven by the 500 and 1,000 rupee note ban appears now to be losing strength. In fact, manufacturers already saw a turnaround, with production being raised in line with higher order books," Lima said.