Services sector grows at fastest pace in 5 months

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India's services sector grew at its fastest pace in five months in December riding on a surge in new business and expansion in employment, but rising input prices will likely add to inflationary pressures in the coming months, a survey showed.

The HSBC Market Business Activity Index -- based on a survey of around 400 firms -- rose to 54.2 in December from 53.2 in November, staying above the 50 mark that separates growth from contraction for the second month in a row.

The index had contracted to levels below 50 in September and sunk to a two-and-a-half year low of 49.1 in October.

In the December survey, the new business sub-index jumped to 55.7 from 52.3 in November, thanks to an improvement in demand.

"Activity in the services sector picked up pace in December led by faster growth in new business, underscoring the resilience of the sector," said Leif Eskesen, economist at HSBC.

Both the services PMI index and the new business sub-index were at their highest levels since July.

The employment index, which expanded for the first time in six months, also added to the positive mood of December's survey.

Optimism over future business prospects remained strong and improved slightly in December from a near three-year low in November.

While the services sector is certainly headed into 2012 on an upswing, the headline PMI index is still a far cry from 2011's peak of 60.1 it hit in February.

Persistent risks of inflation clubbed with the lingering euro zone crisis is likely to continue to mire the Indian economy in 2012.

India's services sector includes the software services industry which gets more than 90 per cent of its revenue from overseas clients.

Two weeks ago, technology bellwether Oracle Corp posted its first quarterly earnings miss in a decade, sending renewed fears of a slowdown in technology spending rippling across the globe.

Oracle's shocking results also had investors worried that they had overestimated the resilience of corporate technology spending in a fragile global economic environment.

In reaction to that news, shares of Indian technology services stalwarts including those of Infosys Ltd and Tata Consultancy Services fell.

Inflationary pressures in the Indian economy, which have been snaking upwards over the past two months, intensified in December with input prices growing at their fastest rate in nine months.

The Reserve Bank of India, which has been consistently raising its key interest rates to battle inflation, kept rates on hold at its December 16 meeting as concerns over growth are seen taking precedence over inflation in 2012.

An interest rate cut by the central bank might be on the cards as the RBI Governor Duvvuri Subbarao told BBC in an interview on Monday that a reversal of monetary tightening could be expected.

However, HSBC's Eskesen said the services and manufacturing PMI numbers suggest that it is 'premature' for the RBI to replace inflation with growth as the main concern.

A similar survey of the manufacturing sector on Monday showed India's manufacturing activity hit a six-month high in December as factory output and new orders from domestic and international firms spiked.