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Growth in services sector slowest since Oct 2011: poll

BANGALORE (Reuters) - Growth in India's services sector eased last month to its slowest since October 2011 as order books filled at a slower pace, a business survey showed on Wednesday, compounding problems for the economy after earlier data showed manufacturing activity was also losing momentum.

The HSBC services Purchasing Managers' Index, based on a survey of around 400 companies, fell to a 17-month low of 51.4 in March from 54.2 in February.

While the headline PMI fell for the second straight month, it has held above the 50 mark that separates growth from contraction since late 2011.

Services make up nearly 60 percent of India's output and were the lone bright spot in an otherwise sluggish economy that likely grew at its slowest pace in more than a decade in the fiscal year that ended in March.

The new business index, which rose an 18-month high in January, also fell for its second straight month to its lowest since November 2011.

"Growth in service sector activity slowed notably due to a deceleration in new business flows. Even so, businesses remained confident about the future," said Leif Eskesen, economist at survey sponsor HSBC.

Strong overseas demand for Indian services has taken a hit from renewed fears over the euro zone debt crisis, which could add to exporters' problems and slow new outsourcing deals for Indian software companies.

Still, firms were more optimistic about the future in March, with the business expectations index rising a touch to 70.1 from 69.4.

A similar manufacturing survey on Monday showed that cooling domestic and foreign demand dragged on growth at Indian factories in March, with the sector expanding at its slowest pace since November 2011.

The PMI services survey also showed costs rose at a slower pace during March. Coupled with easing price growth, for factories the survey suggests inflation will likely ease further.

Wholesale prices, India's main inflation gauge, rose to 6.84 percent in February and although it has generally declined in recent months, it is still above the central bank's perceived comfort level of around five percent.

The Reserve Bank of India, facing intense pressure from industry and government to loosen monetary conditions to arrest the worst economic slowdown in a decade, has cut its key lending rate twice so far this year by 25 basis points each time, lowering the rate to 7.50 percent after leaving it on hold for nine months.

However, the central bank warned the prospect of further monetary easing is limited.

The recent uptick in headline inflation and a record-high current account deficit limit the RBI's space for monetary easing, despite pressure from a government facing elections in 2014.

(Editing by Kim Coghill)