Services growth slips in April, raises rate cut hopes: HSBC

Services sector growth lost momentum for the second straight month in April on weaker domestic demand, raising hopes for an imminent rate cut by RBI, an HSBC survey said today. 

The manufacturing sector also saw its growth rate coming down in the last month, as per another HSBC survey released earlier this week, which coupled with a moderate inflation may convince the Reserve Bank to cut its policy rate for the third time this year.

RBI will hold its next monetary policy review on June 2, although the earlier two rate cuts -- first in January and then in March -- were effected outside the scheduled meetings. HSBC's monthly services sector survey also showed that the contraction in its growth rate led to some job losses and the companies adopting a cost-cautious approach towards hiring.

The HSBC India Services Business Activity Index, which tracks changes in activity at the service companies, fell to a three-month low of 52.4 in April from 53.0 recored in March.

A score above 50 indicates that the sector is expanding, while a figure below that level means contraction.

"The slowdown in the Indian service sector continued in April with weaker activity growth reflecting softer demand conditions," Markit Economist Pollyanna De Lima said.

Meanwhile, April data highlighted falling payroll numbers in the Indian services sector. However, the rate of job cuts was only fractional.

"Accompanying the subdued outlook in the opening month of the fiscal year, was a return to job shedding as companies maintained a cost-cautious approach," Lima added.

On the positive side, the confidence among services companies regarding the one-year outlook for activity improved, indicating that firms are optimistic that the current deceleration in growth is a temporary soft patch.

The slower rise in service sector activity was matched by a softer increase in manufacturing production. As a result, the headline HSBC India Composite PMI Output Index fell from 53.2 in March to a six-month low of 52.5 in April, HSBC said.

On prices, HSBC said that in line with rising raw material costs, average input prices in the Indian service economy increased further in April. Nonetheless, the rate of inflation was moderate.

"Inflation rates for both input and output prices were weak by historical standards, providing the RBI with more scope for further rate cuts," Lima said.

Lima further added that an expansionary approach to monetary policy would, at a time when the economy is losing traction, provides much needed support for further growth.