India's services sector expanded at its slowest pace in 20 months in May as soaring prices and interest rate hikes gnawed at new business growth and reduced the level of optimism, a survey showed on Friday.
The seasonally adjusted HSBC Markit Business Activity Index, based on a survey of over 400 firms, slipped to 55.0 in May from 59.2 in April, marking its twenty-fifth successive month above the 50 level that divides growth from contraction.
While the latest reading underlines a reasonably solid pace of growth in the services sector, its decline is an indication that continuous rate rises aimed at containing inflation are putting the brakes on India's rapid expansion.
"The easing momentum for business activity and new business is evidence that policy tightening and high inflation is filtering through to growth," said Leif Eskesen, chief economist for India & Asean at HSBC.
All sub-indexes saw a fall when compared to April, with the exception of input costs and employment.
New business received by service companies remained strong but the pace of expansion slowed with the sub-index falling to its lowest level since October last year.
Among the sub-indexes, business expectations saw the steepest fall to 67.8 in May from 72.8 in April, as respondents, though confident of the sector's performance over the next 12 months, slightly tempered expectations as economic uncertainty loomed.
Data released earlier this week showed Asia's third-largest economy grew at its slowest annual pace in five quarters in January to March as consecutive interest rate hikes, aimed at reigning in soaring inflation, began to take effect.
Gross domestic product rose 7.8% from a year earlier, lower than 8.3% in the previous quarter and below the median 8.2% forecast in a Reuters poll.
While weaker-than-expected growth might cause the Reserve Bank of India (RBI) to raise rates in smaller increments, the survey showed price pressures will persist.
"The RBI has no choice but to continue its tightening cycle to bring about a slowdown in domestic demand, which is sufficient to lessen capacity constraints and ease inflation pressures," Eskesen said.
Input costs increased markedly in May due to rising wage bills and raw material costs.
Further inflation pressures are expected as the economy braces for an increase in government-controlled prices of diesel and cooking fuels.
Prices charged also rose in May as service providers transferred rising costs to consumers, but the slightly weaker pace suggested a slight reduction in margins.
Last month the RBI raised rates by half a percentage point, declaring some near-term growth would need to be sacrificed to tame inflation, which stood at 8.66% for April.
The service sector continued to add jobs with the index for employment signalling an increase in the pace of hiring.
Data released earlier in the week showed manufacturing PMI dipped and factory growth eased globally, with the most pronounced slowdown seen in the United States.