The services sector returned to the growth zone in February after three months of demonetisation- driven contraction but recovery was 'mild' and business confidence remained subdued, a monthly survey showed today.
Besides, higher input costs forced companies to hike prices and the rising inflationary pressure may result in the Reserve Bank keeping away from any interest rate easing in the immediate future.
The Nikkei India Services Purchasing Managers' Index (PMI), which tracks services sector output on a monthly basis, stood at 50.3 in February, up from 48.7 registered in January.
After slipping to a near three-year low last November, which was the first monthly drop in output since June 2015, the headline index edged has now edged back above the 50.0 mark, which separates expansion from contraction.
"The upturn in services activity follows news from the sister PMI survey showing factory production growing for the second straight month in February," said Pollyanna De Lima, economist at IHS Markit, also the author of the report.
However, the year-ahead outlook for the services sector remained subdued. The survey participants were less optimistic about the 12-month outlook as firms were concerned about market competition.
The muted sentiments were reflected in the payroll numbers as well as services companies continued to reduce staff count.
"It is still too early to state that expansion rates will climb to their trend levels in the near term. Companies remain reluctant to take on additional staff and confidence towards the 12-month outlook for output dipped to its second-lowest mark in over one year," Lima said.
These factors indicate that, so far, firms are doubtful about the sustainability of the economic recovery, she added.
Meanwhile, the Nikkei India Composite PMI Output Index -- which maps both manufacturing and services sectors -- rose from 49.4 in January to 50.7 in February, pointing to the first increase in overall private sector activity across India since last October.
"With demand conditions strengthening in India, new business inflows rose in both sectors, leading to the first increases in private sector new work orders and output since October 2016. Nevertheless, growth rates were mild at best and far from their historical averages," Lima added.
On the prices front, input cost inflation accelerated and service providers also raised their charges so much so that "the increase in output charges was the first in five months and the most pronounced since mid-2016", the survey said.
The increase in prices may spoil the case for any immediate interest rate cut by the Reserve Bank.
The Reserve Bank in its monetary policy review meet on February 8 kept key interest rate unchanged at 6.25 per cent and said it is awaiting more clarity on the inflation trend and impact of demonetisation on growth.
The next meeting of the MPC is scheduled for April 5-6, 2017.
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