India’s Services Sector in Contraction Zone Before Rate Review

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India’s main services index signaled a contraction for a third straight month, boosting the case for monetary policy makers to keep interest rates unchanged at a record low to aid the economy.

The IHS Markit India Services Index rose to 45.4 in July from 41.2 in June, but still below the 50 reading that indicates a contraction. That performance by the industry, which accounts for more than half of the nation’s gross domestic product, also kept the composite PMI in contraction zone at 49.2.

The only silver lining came earlier this week from a similar survey of purchasing managers in the manufacturing sector, with the index returning to expansion last month.

The latest reading adds to doubts about the economy’s ability to sustain a recovery amid Covid-19 infections raging on in some parts of the country. That is likely to add pressure on the central bank’s Monetary Policy Committee to support growth by keeping interest rates on hold on Friday.

All economists in a Bloomberg survey as of Wednesday morning expect the MPC to stand pat for a seventh straight meeting.

Both manufacturing and services sectors, which contribute more than two-thirds of India’s GDP, contracted in June as the slow easing of localized lockdowns hurt activity and demand. While the deadly second wave of Covid-19 has receded, Asia’s third-largest economy is facing a bumpy ride given the slow pace of vaccinations and the looming threat of another wave.

The survey showed price pressures were accelerating, while there was a further reduction in the workforce. New work orders fell for a third month running with firms downbeat about future prospects.

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