Robust demand propels India's services sector growth in February, PMI shows
BENGALURU, March 5 (Reuters) - Growth in India's services sector accelerated in February, supported by robust demand and a firm business outlook that led to a substantial increase in hiring, a survey showed.
Asia's third-largest economy expanded 6.2% year-over-year last quarter, lifted by government and consumer spending. The government expects India to grow 6.5% for the full financial year on expectations urban consumption will improve after weakening due to feeble job and income growth.
HSBC's final India services Purchasing Managers' Index (INPMIS=ECI), opens new tab, compiled by S&P Global, rose to 59.0 in February from January's 26-month low of 56.5 but was lower than a preliminary estimate of 61.1.
It has remained above the 50-mark separating expansion from contraction since mid-2021.
"Global demand, which grew at its fastest pace in six months according to the new export business index, played a major role in driving output growth for India's services sector," noted Pranjul Bhandari, chief India economist at HSBC.
Overall demand for services picked up in February, recovering from January's 14-month low, while growth in foreign orders reached its highest in six months.
Services companies remained optimistic about the business outlook for the upcoming 12-months. The future activity sub-index, gauging sentiment, stayed firm despite falling to a six-month low.
To meet rising demand, companies hired additional staff leading to a strong expansion in employment.
The rate of cost price inflation slipped to a four-month low. Despite that, firms passed on some of the extra burden to customers leading to a higher increase in charge inflation last month.
Inflation in India has mostly remained within the Reserve Bank of India's (RBI) target range of 2-6%, prompting the central bank to cut its key repo rate in February. The RBI lowered the interest rate to 6.25% from 6.50% and is expected to ease further to boost the economy.
The substantial rise in services growth offset a 14-month low expansion rate in manufacturing (INPMI=ECI), opens new tab, driving the overall Composite PMI to rise to 58.8 last month from 57.7 in January.
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But now, investors are increasing their hedging," says Sophia Drossos, economist and strategist at the hedge fund Point72. And there is a lot of dollar exposure to hedge. At the end of March foreign investors held $33 trillion of U.S. securities, with $18.4 trillion in equities and $14.6 trillion in debt instruments. The dollar's malaise has upended its traditional relationships with stocks and bonds. Its generally negative correlation with stocks has reversed, as has the usually positive correlation with bonds. The divergence with Treasuries has gained more attention, with the dollar diving as yields have risen. But as Deutsche Bank's George Saravelos notes, the correlation breakdown with stocks is "very unusual". When Wall Street has fallen this year the dollar has fallen too, but at a much faster pace. And when Wall Street has risen the dollar has also bounced, but only slightly. This has led to the strongest positive correlation between the dollar and S&P 500 in years, though that's a bit deceptive, as the dollar is sharply down on the year while stocks are mildly stronger. Of course, what we could be seeing is simply a rebalancing. Saravelos estimates that global fixed income and equity managers' dollar exposure was at near record-high levels in the run-up to the recent trade war. This was a "cyclical" phenomenon over the last couple of years rather than a deep-rooted structural one based on fundamentals, meaning it could be reversed relatively quickly. But, regardless, the dollar's hedging headwind seems likely to persist. "Given the size of foreign holdings of both stocks and bonds, even a modest uptick in hedge ratios could prove a considerable FX flow," Morgan Stanley's FX strategy team wrote last month. "As long as uncertainty and volatility persist, we think that hedge ratios are likely to rise as investors ride out the storm." What could move markets tomorrow? Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, opens new tab, is committed to integrity, independence, and freedom from bias.
