India's PMI services business activity index rose from 46.8 in December to 48.7 in January. This index dropped sharply from 54.5 in October to 46.7 in November, largely due to cash shortages caused by the Indian government's decision in early November to withdraw high-denomination currency notes as legal tender. Since then the index has continued to show contraction in the services sector but has increased slightly in consecutive months, suggesting that conditions may be starting to recover from the initial impact.
The Composite PMI Output Index, which reflects activity in both manufacturing and the services sector, also rose in January to 49.6, from a 38-month low of 47.6 in in December. The headline index for the manufacturing PMI survey, published earlier in the week, rose from 49.6 in December to 50.4 in January, indicating moderate expansion in the sector.
The increase in the services PMI headline index reflects some improvement in new orders, which fell at a slower pace in January. Survey respondents cited ongoing cash shortages as a factor weighing on demand, but also reported greater confidence in the outlook for activity in the next twelve months, reflecting a view that market conditions will soon normalise. The services survey also showed employment levels were broadly unchanged in January, as did the manufacturing survey, providing further evidence that firms are relatively confident about the near-term outlook.
Most service sector respondents reported only modest changes in input costs, with the survey indicating a modest fall in output prices for the fourth consecutive month. Manufacturers, in contrast, reported stronger input costs and selling prices in January.
The two PMI surveys for India in January suggest that the impact of cash shortages remains significant at the start of the year but is starting to moderate, with employment levels still steady and firms appearing confident that demand will pick up in coming months. At their last policy review, officials at the Reserve Bank of India left policy settings unchanged, partly reflecting a view that the impact of cash shortages may be short-lived. The next policy meeting is scheduled for next 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.