India's services sector expands at fastest pace so far this year in March

India's services sector expanded at its fastest pace so far this year in March as an easing of Covid-19 restrictions boosted demand, but elevated inflationary pressures clouded business confidence, a private survey showed.

The S&P Global India Services Purchasing Managers' Index rose to 53.6 in March from 51.8 in February, beating the 52.5 estimate in a Reuters poll.

While the index remained above the 50-mark separating growth from contraction for an eighth straight month, input costs rose at the sharpest pace in 11 years.

"The war in Ukraine exacerbated lingering issues in supply chains, triggering a reacceleration in inflation across the Indian service economy," noted Pollyanna De Lima, economics associate director at S&P Global.

Higher chemical, fuel, raw materials, retail, transportation and vegetable prices increased operating expenses, dampening business confidence.

Domestic demand increased on high footfall, leading to rising sales and pushing the new business sub-index to a three-month high.

However, international demand contracted at its sharpest rate in six months as the Russia-Ukraine war affected supply chains.

Business expectations remained positive on hopes that a relaxation in virus containment measures will support business activity. But concerns about high inflation kept sentiment subdued, broadly matching February's level.

Prices charged rose marginally as only a few firms passed the cost burden on to consumers.

"Sales were somewhat supported by only mild adjustments to output charges, however, with consumers likely to face soaring prices in the coming months as rising cost burdens feed through to services charges," added De Lima.

Yet, the Reserve Bank of India was not expected to raise its key interest rate until at least August, according to a Reuters poll of economists, who said the central bank should now shift its focus from growth to inflation.

Firms reduced their workforce for the fourth straight month in March but there were tentative signs of stabilisation. The employment sub-index was its highest in this contraction streak and only fractionally below the 50 threshold.

The composite index was its highest in three months, rising to 54.3 in March from 53.5.