India’s dominant services sector expanded in December, reversing the previous month’s decline and boosting expectations that the worst is over for Asia’s third-largest economy.
The Nikkei India Services purchasing managers’ index rose to 50.9 in December from 48.5 in November, data showed Thursday, above the 50 mark that separates growth and contraction. The manufacturing gauge had advanced to 54.7 from 52.6, pushing up the composite index to 53 from 50.3 — the highest since October 2016.
The data endorses “the standpoint that the economy is recovering from the implementation of the twin shocks of demonetization and GST,” Aashna Dodhia, an economist at IHS Markit, said in a statement. That said, services remain “on a weak growth trajectory amid reports that the GST was still hindering efforts to secure new clients,” she added, referring to the goods and services tax.
India is due to announce its first official forecast of economic growth on Friday. A Bloomberg survey predicts gross domestic product will grow 6.7 percent in the year through March 2018, the slowest pace since 2014 when Prime Minister Narendra Modi came to power. Demand and investment have been hit by his decision in November 2016 to invalidate high-value currency notes and the chaotic roll out last year of the GST.
Nevertheless, recent high frequency indicators suggest a recovery. The PMI numbers show activity was picking up in information and communications along with the finance and insurance sectors. Still, growth remains well below the average recorded for the survey’s history.
As a result, price pressures were subdued. Input cost inflation eased from November’s four-year high, allowing service providers to raise output prices at the slowest pace since mid-2017. That could signal a pause in overall cost pressures which have gathered pace in recent months and seen the Reserve Bank of India turn relatively hawkish in its commentary about monetary policy.
Investors have turned bearish on Indian bonds after inflation in November breached the RBI’s 4 percent medium-term target. Overnight indexed swaps indicate the market is preparing to price in a rate-hike cycle.