The services sector appears to be in good shape as a survey-based index released on Friday rose to 54.2 in July from 52.6 in June. This is the second successive month of expansion and also signaled the strongest rate of output growth since October 2016.

This index is better known as the Nukkei India Purchasing Manager Index (PMI) and prepared on the basis of survey conducted among purchasing managers of over 400 private companies. These companies belong to five sectors namely Consumer Services, Transport & Storage, Information & Communication, Financial & Insurance and Real Estate & Business Services.  An index over 50 shows expansion and if it goes below 50, it indicates contraction. The index and subsequent report is prepared by IHS Markit.

The report said the latest upturns in business activity and new orders were the fastest since October 2016 and June 2017 respectively. Amid reports of improved demand conditions, business confidence towards the 12-month outlook picked up from June’s recent low. Subsequently, firms raised their staffing levels at the strongest pace since April. However, inflationary pressures remained marked during July.

Although manufacturing slowed down a bit in July, it was still in expansion mode and that helped the Composite PMI Output Index rise to 54.1 in July from 53.3, driven by output growth in both the manufacturing and service sectors. The latest rise in overall output was marked and the strongest seen since October 2016. Amid reports of strong underlying demand, manufacturing companies raised output for the twelfth consecutive month in July.

Aashna Dodhia, Economist at IHS Markit, said that marked expansions in both the manufacturing and service sector, with stronger growth in the latter, powered the fastest improvement in overall operating conditions in the economy since October 2016. “However, there are some warning signs reflected by PMI price data. Although overall input cost inflation softened from June’s near four-year high, service companies faced the fastest rise in input costs since March amid reports of high oil prices. Indeed, an uncertain global climate, currency weakness and strong inflation may continue to place pressure on the central bank to hike interest rates over the coming months,” she said.

According to the report, although softening from June’s six-month high, the rate of expansion was marked. Underpinning the expansion in service activity was a further rise in new business inflows. Moreover, the rate of expansion quickened to its fastest since June 2017. Panelists associated the strong market demand to growth in new client wins. Service companies projected a rise in activity in the next 12 months, with the level of sentiment picking up from June’s recent low. An expected improvement in demand conditions was the key factor supporting business confidence, respondents said.

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