India services PMI falls for 2nd straight month in December following demonetization, likely to rise in medium-term

Performance of services sector in the Indian economy deteriorated during the month of December, following a short-term crisis-like situation due to the demonetization policy imposed by Prime Minister Narendra Modi with effect from November 8, 2016 midnight.

The seasonally adjusted headline Nikkei India Services Business Activity Index registered 46.8 in December, little-changed from November’s reading of 46.7 and indicating a further solid contraction in output. Moreover, the downturn was broad-based by sub-sector, with Hotels & Restaurants firms the worst performers.

Cash flow issues reportedly caused another increase in outstanding business volumes. Backlogs decreased for the seventh straight month in December, although only moderately. In spite of higher backlogs, service providers made cutbacks to staffing levels during December. That said, the drop in employment was only fractional, thereby continuing a trend of broadly stagnant workforces that was evident throughout 2016.

Input prices faced by service providers in India continued to rise in December. However, with less than 1 percent of firms indicating higher cost burdens and the remaining respondents signalling no change since November, the rate of cost inflation was only marginal and negligible in the context of historical data.

On the other hand, output prices were lowered for the third successive month amid intense competitive pressures and attempts to stimulate demand. Nevertheless, the rate of discounting was marginal overall.

Indian service providers signalled optimism regarding the 12-month outlook for activity during December, although the level of positive sentiment dipped to the third-lowest in over 11 years of data collection.

Meanwhile, USD/INR traded at 68.18, up 0.08 percent; at 6:00GMT, the FxWirePro's Hourly Dollar Strength Index remained neutral at 22.56 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex