Services sector growth hits 17-month high in June

New Delhi: Activity in India`s services sector grew at its fastest pace in well over a year in June as new business poured in, adding to signs of a pick-up in the economy even as inflation remains high, a survey showed on Thursday.

The HSBC Services Purchasing Managers` Index, compiled by Markit, jumped to a 17-month high of 54.4 in June from 50.2 in May.

That was the biggest one-month rise in the index in four years. Before May, the services PMI had been stuck below 50, which divides growth from contraction, for almost a year.

The data supports growing optimism among Indian firms that the new government led by Prime Minister Narendra Modi will push through reforms after years of policy paralysis.

India`s benchmark BSE Sensex equity index has been hitting record highs on hopes that those reforms will be psuhed through by the majority government, India`s first in three decades.

"After months of subdued activity, the Modi wave has struck the service sector and lifted growth to a 17-month high," said Frederic Neumann, co-head of Asian Economic Research at HSBC.

"New business flows and stronger business sentiment supported the rise. As we move along, faster reforms due to political stability should fuel the momentum."

The new orders sub-index jumped to 54.3 in June, the highest since February last year.

The PMI data also showed input prices rose at the fastest pace in five months, but firms passed only a small portion of those costs to consumers.

"Be sure to expect bumps along the way, as tensions in the Middle East and the absence of monsoon clouds play spoil sport," Neumann added.

A similar business survey on Tuesday showed Indian manufacturing activity grew at its fastest pace in four months in June, while the output prices index rose to an eight-month high, suggesting inflation could accelerate further and compound the challenges facing the Reserve Bank of India.

The RBI has hiked rates three times since Raghuram Rajan took over as governor last September to tackle high inflation, even as economic growth slowed to decade-lows.