India’s services sector posted stable growth in May

India’s services sector maintained solid growth in May, supported by strong export demand and unprecedented hiring activity. New business rose sharply, especially from overseas markets. However, escalating input and output costs added inflationary pressure, which may impact RBI’s policy stance.

India’s services sector sustained strong growth in May, driven by robust export demand and record hiring, despite rising price pressures, according to a recent survey. The HSBC India Services Purchasing Managers’ Index (PMI), compiled by S&P Global, stood at 58.8 in May, slightly up from 58.7 in April but below an earlier preliminary reading of 61.2. The index has remained above the 50 mark—indicating expansion rather than contraction—for nearly four years.

New business, a crucial indicator of demand, expanded sharply in May, maintaining growth levels seen since February. Companies credited this sustained momentum to effective advertising, positive demand trends, and repeat business from existing clients. 

Export orders showed one of the strongest increases in the survey’s more than decade-long history, highlighting strong international demand.

For supporting the growth, service providers increased hiring at the fastest pace since the survey began, with nearly 16% of firms adding staff. However, this expansion contributed to rising cost pressures. Both input costs and output charges rose faster in May, surpassing historical averages. Companies reported higher expenses for cooking oil, materials, meat, and overtime payments, resulting in the sharpest input price inflation since January.

These rising costs could pose challenges for the Reserve Bank of India’s (RBI) monetary policy. Although inflation remains below the RBI’s 4% target, the central bank has cut the repo rate by 50 basis points this year and is expected to reduce it further by 25 basis points to 5.75%, according to a Reuters poll.

Despite facing cost pressures, business confidence improved from April’s 23-month low, with firms optimistic about future growth due to expanding workforces, growing client bases, and ongoing marketing efforts. The HSBC India Composite PMI, which covers both manufacturing and services, eased slightly to 59.3 in May but still pointed to strong private sector expansion.