India's Service Sector Growth Eases But Holds Strong Despite Weaker Global Demand

HSBC Services PMI Drops to 60.9, Marking 26th Month of Expansion; Business Optimism Hits Six-Month High

India's services activity continued its robust expansion streak in September, logging the twenty-sixth consecutive month of growth, though the pace moderated slightly from the previous month’s high. The HSBC India Services Purchasing Managers’ Index (PMI), compiled by S&P Global and released on Monday, registered 60.9 in September, down from 62.9 in August. Crucially, the index remained firmly above the neutral 50-mark, signaling strong health in the sector.

 

According to Pranjul Bhandari, Chief India Economist at HSBC, while business activity eased from the recent August peak, "nothing in the survey suggested there is a big loss in growth momentum in services." Instead, she pointed to a significant indicator of future confidence: "the Future Activity Index rose to its highest level since March, indicating strengthening optimism services companies about business prospects."

 

Slowdown in Demand and Job Creation

 

The moderation in growth was largely attributable to a slowdown in demand, particularly from international clients.

• Weaker Exports: New orders continued to climb in September, but the growth rate was slower than in August. The increase in exports was the slowest recorded since March, with companies citing intensified competitive conditions and cost-control measures as primary factors limiting further growth.

   

• Job Slowdown: The pace of job creation also slowed significantly. The report noted that fewer than 5% of companies reported hiring growth during the month.

• Input Costs: Services firms continued to face increased operational costs, driven particularly by higher expenses for labor and materials. However, the prices charged for services rose at their slowest pace since March, indicating pressure on margins as companies balance higher costs against slower price transmission. Overall inflation held steady but was below the previous month's level and the long-term average.

Broader Economic Picture

 

Despite the easing pace, business sentiment about the future improved, with optimism reaching a six-month high. Companies cited anticipated positive drivers for growth, including successful advertising campaigns, efficiency improvements, competitive pricing strategies, and tax cuts.

The slowdown in services was mirrored by a moderation in the manufacturing sector:

• Manufacturing Eases: India’s manufacturing activity also expanded at a slower pace, with the Manufacturing PMI easing to 57.7 in September, down from 59.3 in August. While still strongly expansionary, this reading marked the weakest improvement in the health of the sector since May.

• Composite Index Slips: Reflecting the broad-based slowdown across both major sectors, the HSBC India Composite PMI Output Index slipped to 61.0 in September from 63.2 in August. This figure marks the weakest rate of expansion since June and indicates softer increases in total new orders across both manufacturing and service segments combined.