India's PMI services business activity index rose slightly to 46.8 in December from 46.7 in November. This follows a very sharp drop in the index in November from 54.5 in October, due largely to the impact of cash shortages caused by the Indian government's decision early in the month to withdraw high-denomination currency notes as legal tender. With the headline index still well below 50, December's survey shows that cash shortages have continued to contribute to contraction in the services sector.
The Composite PMI Output Index, which reflects activity in both manufacturing and the services sector, fell to 47.6 in December from 49.1 in November. The headline index for the manufacturing PMI survey, published earlier in the week, fell to 49.6 in December from 52.3 in November.
The fall in the headline activity index for the services PMI reflects a sharp drop in new business for respondent firms, who reported the worst contraction in new work since September 2013. Respondents to the manufacturing survey also reported weaker new business in December. Similar to the manufacturing survey, the services survey indicated modest job losses in December, suggesting that firms have yet to respond to weaker activity with large-scale cuts to payrolls.
Most service sector respondents reported no change in input costs, with the survey indicating a modest fall in output prices as firms attempt to boost demand. Although the services survey suggests that firms expect activity to increase over the next twelve months, the strength of this confidence is historically low.
The two PMI surveys for India in December clearly show that cash shortages continued to weigh on activity and confidence towards the end of the year. Officials at the Reserve Bank of India suggested this impact may be relatively short-lived when they left policy rates on hold at their last meeting in early December. However, if incoming data indicate that the disruption caused by the government's decision is persisting, there will likely be strong pressure on the RBI to deliver a rate cut at its next meeting in early February.
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.