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Services sector growth shrinks for second straight month, increasing chances for rate cut by RBI

Services companies expect output to increase over the next 12 months but the degree of optimism weakened to the lowest ever since February.

RBI, RBI rate cut, service sector growth, PMI, PMI output, Raghuram Rajan, Monetary policy review, interest rate cut, service sector slowdown, Nikkei, PMI, PMI output composite index, manufacturing, RBI policy rate Services sector growth in the country contracted for the second straight month in May adding to the clamour for a rate cut by the RBI.

Services sector growth in the country contracted for the second straight month in May and also registered the weakest rise since last November, adding to the clamour for further rate cuts by the Reserve Bank.

The Nikkei Services Business Activity index, which maps the services sector activity, fell from 53.7 in April to 51.0 in May, pointing to a slight expansion in business activity which has been the weakest since last November.

A reading above 50 represents expansion, while one below this level means contraction.

Meanwhile, the Nikkei India Composite PMI Output Index, which maps both manufacturing and services sectors, fell to a six-month low of 50.9 in May, from 52.8 in April.

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“Latest PMI numbers raise doubts about the effectiveness of economic and monetary policies,” Pollyanna De Lima, economist at Markit, which compiles the survey, said.

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Manufacturing production growth eased in May, which combined with the slowdown in services resulted in a weaker increase in private sector output, the survey said.

Lima further said that “ongoing weakness in manufacturing and services was evident in May, with output growth losing momentum for a second straight month. Overall expansion across the two sectors was the lowest since last November, as was the case for new orders”.

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Meanwhile, the confidence of service providers dipped to a three-month low. Though services companies expect output to increase over the coming 12 months, but the degree of optimism weakened to the lowest since February.

“The gloomy growth picture will be a concern to policymakers and will raise the chances of further cuts in interest rates by the RBI,” Lima said, adding “this would be supported by subdued inflationary pressures, with May data pointing to weaker increases in both costs and charges”.

Earlier in April, the RBI cut its policy rate by 0.25 per cent to 6.5 per cent. While this was the first rate cut after a gap of six months, the RBI has lowered its rate by 1.5 per cent cumulatively since January 2015.

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However, the industry still wants further rate cuts from the apex bank to boost investment.

Meanwhile, the Indian economy grew at 7.9 per cent in the fourth quarter of 2015-16 taking the overall GDP growth to a five-year high of 7.6 per cent in the fiscal.

First published on: 03-06-2016 at 12:16:21 pm
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