Markets
Services PMI: Steep price hikes could take the wind out of companies' sails
Summary
- A pick-up in input cost pressures and stronger pipelines of new business gave services providers the confidence to hike selling prices again in July.
- But continuous price increases could dampen demand, especially in discretionary services.
Business activity in India’s services sector has lost some momentum. The seasonally adjusted HSBC India Services Business Activity Index eased marginally to 60.3 in July from 60.5 in the previous month. A reading above 50 indicates expansion.
Domestic sales volumes got a boost from various factors such as buoyant demand and growing online presence, said the survey participants. Exports were solid on a footing as well with new export orders seeing an impressive rise. Austria, Brazil, China, Japan, Singapore, the Netherlands and the US were among the countries responsible for the rise in export orders. Consequently, total new orders expanded at a historically sharp pace.
More price hikes
A pick-up in input cost pressures and stronger pipelines of new business gave services providers the confidence to hike their selling prices again in July. A PMI sub-index measuring the overall rate of charge inflation climbed to a seven-year high of 54.3.
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The rising costs of labour and materials were a particular bother for services providers. Within materials, the cost increase was attributed to dearer eggs, meat and vegetables.
Lately, both services providers and manufacturers have been hiking prices to pass on their rising input costs to customers. Worryingly, the composite charged inflation reading climbed to a near 11-and-a-half-year high of 54.4 in July. The composite PMI data is a weighted average of the manufacturing and services PMI readings.
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For now, services firms remain strongly optimistic about their growth prospects. A PMI gauge of business confidence for services providers rose to 63.7 in July from 60.3 in June. Around 30% of the survey panel forecast greater output volumes in the next 12 months, while only 2% expect a decline. Anecdotal evidence suggested that confidence in the outlook for demand and sales, alongside improved customer engagement and new enquiries, boosted optimism, said the PMI report.
Pressure on demand
However, continuous price increases could dampen demand, especially in discretionary services. It could also further delay the much-anticipated interest rate cuts by the Reserve Bank of India. The central bank is scheduled to meet on 6-8 August and is widely expected to maintain a status quo on interest rates this time as well.
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“While services sector momentum has held steady so far, we don’t expect food and fuel-led inflation to decline sequentially. As for interest rate cuts, we don’t see them happening before February 2025," said Teresa John, economist and deputy head of research at Nirmal Bang Institutional Equities.
Nonetheless, GDP growth is expected to decelerate to 6.6% in FY25 from 7.8% in FY24 as demand for both products and services is likely to be lower this fiscal year, partly owing to the high base, she added.
