India services growth hits 11-month high in July on stronger exports, PMI shows

India's services sector expanded at an 11-month high in July, with the HSBC India Services PMI rising to 60.5, driven by robust international and sustained domestic demand. While finance and insurance led growth, hiring slowed to a 15-month low. Significantly, price pressures intensified as firms passed on higher input costs, a factor that could influence the Reserve Bank of India's monetary policy decisions, despite current expectations for an initial rate hold followed by a cut next quarter. The composite PMI, including manufacturing, also saw its strongest expansion since April 2024.

Analysis

India's services sector demonstrated robust expansion in July, with the HSBC Services PMI accelerating to an 11-month high of 60.5, surpassing preliminary estimates. This growth was underpinned by a marked increase in international demand, reflected in the new export business sub-index registering its second-strongest expansion in a year, and sustained domestic sales. Sectoral performance was uneven, with finance and insurance leading both new orders and activity, while real estate and business services lagged. However, two key counter-signals emerge: hiring slowed to a 15-month low despite strong demand, and inflationary pressures intensified. Firms faced higher input costs for food, freight, and labor, which they passed on to customers, causing charge inflation to exceed input cost inflation. This development presents a direct challenge to the market consensus, cited from a Reuters poll, that the Reserve Bank of India will hold rates in August and cut next quarter. The overall economic picture, reinforced by the Composite PMI rising to 61.1, is one of strong growth momentum but with increasing inflation and labor market caution.

Key Decisions for Investors

• Monitor upcoming inflation data closely, as intensifying price pressures may compel the Reserve Bank of India to delay its anticipated rate cuts, posing a risk to rate-sensitive equities and fixed-income assets.
• Consider overweighting exposure to leading sectors like finance and insurance, which are demonstrating superior growth in new orders and business activity, while being cautious on lagging segments such as real estate.
• The divergence between strong PMI growth and the 15-month low in hiring warrants scrutiny, as this could signal a nearing growth peak or a productivity-driven expansion that may not be sustainable without broader job creation.