India's PMI services business activity index fell to 46.7 in November, a very sharp decline from 54.5 in October. This sign of weaker activity in November appears to be primarily due to the Indian government's decision early in the month to withdraw high-denomination currency notes as legal tender, a move that has created uncertainty and disruption for businesses and consumers, at least in the near-term. This is the first time this index has fallen below 50.0, indicating a contraction in the sector, since June 2015, and the fall in the index in November was the biggest in almost three years.
The Composite PMI Output Index, which reflects activity in both manufacturing and the services sector, fell to 49.1 in November from 55.4 in October. The headline index for the manufacturing PMI survey, published last week, fell to 52.3 in November from 54.4 in October.
The service sector survey showed a fall in new business for respondent firms for the first time in 17 month, with the relevant index recording its steepest decline in over three years. Respondents cited cash shortages as a major factor. Last week's manufacturing survey showed new orders still rose in November but at a slower pace than in October.
Despite this weakness in new business and new orders in November, respondents in the services sector reported modest job gains, while the manufacturing survey last week reported steady employment levels. This could indicate that businesses expect the impact of the government's decision to be short-lived, Indeed, the service sector survey notes that firms expect activity to increase over the next twelve months with the level of confidence at its highest since August. Similar to the results of the manufacturing survey, some services sector respondents indicated that they expect the government's decision, which is aimed at curbing tax avoidance and corruption, will help them win new business at the expense of non-compliant firms.
Respondents to the services sector survey reported steady input costs in November costs, with selling prices raised but by a smaller amount than in October. The withdrawal of currency notes also likely contributed to this moderation in price pressures in November.
The two PMIs released for November clearly show that the withdrawal of high-denomination notes has had a significant impact on activity and prices in the Indian economy. Longer-term, however, the impact of this decision will likely depend on the extent to which weaker activity by non-compliant firms is offset by stronger activity by compliant firms. Nevertheless, given the disruption this has caused in the near-term, and the possible reduction in price pressures, there now appears to be a stronger case for the Reserve Bank of India to cut policy rates at its meeting later this week.
The Services Purchasing Managers' Index (PMI) is a joint publication by Markit and the Nikkei media organisation and provides an estimate of business activity in private sector services for the previous month by using information obtained from a representative sector survey incorporating around 800 companies. Results are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting).
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the Markit PMIs, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.
The survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month. For each of the indicators the report shows the percentage reporting each response, the net difference between the number of higher/better responses and lower/worse responses, and the diffusion index. This index is the sum of the positive responses plus a half of those responding the same.
The Purchasing Managers' Index (PMI) survey methodology has developed an outstanding reputation for providing the most up-to-date possible indication of what is really happening in the private sector economy by tracking variables such as sales, employment, inventories and prices. The indices are widely used by businesses, governments and economic analysts in financial institutions to help better understand business conditions and guide corporate and investment strategy. In particular, central banks in many countries use the data to help make interest rate decisions. PMI surveys are the first indicators of economic conditions published each month and are therefore available well ahead of comparable data produced by government bodies.