India’s services sector expanded at its slowest pace in more than four years in July as weaker client demand, intense competition and fading business confidence weighed on activity, adding to signs that momentum across the country’s private sector is easing even as inflation remains contained ahead of the Reserve Bank of India’s policy decision.
The latest survey comes after manufacturing activity also slowed to a near five-year low in July, supporting evidence that Asia’s third-largest economy is experiencing a broad moderation in growth following a prolonged period of strong expansion.
According to the S&P Global HSBC India Services Purchasing Managers’ Index (PMI), compiled by S&P Global, the index fell sharply to 53.3 in July from 57.4 in June. Although the reading remained above the 50-point threshold separating expansion from contraction, it marked the weakest pace of growth since early 2022 and came in slightly above the preliminary estimate of 53.1.
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The slowdown was driven primarily by softer demand, with new business expanding at its weakest pace in nearly four-and-a-half years.
Companies cited heightened competition and reduced customer spending as key factors weighing on sales growth. While international demand remained supportive, export orders also moderated from the previous month, although they continued to outperform overall domestic demand.
The combination suggests that external markets are providing some cushion for service providers, but are no longer strong enough to offset weakening conditions at home.
Business confidence also deteriorated further, falling to a seven-month low and marking the fourth consecutive monthly decline. Firms remained optimistic that stronger demand, tourism and new business opportunities would support activity over the coming year, but sentiment has become increasingly cautious amid slowing order growth.
Employment continued to expand for a seventh consecutive month, although hiring remained subdued.
Job creation improved modestly from June’s six-month low, but most companies reported no change in staffing levels, with only a small proportion adding workers. The softer labour market trend mirrors slowing demand and suggests businesses are becoming more cautious about expanding payrolls until growth improves.
Cost pressures eased further during July, providing some relief for businesses. Input cost inflation slowed for a fourth straight month to its lowest level since January, helped by moderating price increases across key inputs.
However, companies continued to raise prices charged to customers, with selling price inflation accelerating to a three-month high as firms passed part of their remaining cost increases on to clients.
Even so, inflationary pressures remain considerably more contained than in many other major economies, giving the Reserve Bank of India greater flexibility in setting monetary policy.
But the weakness in services added to slowing manufacturing activity, pushing India’s Composite PMI, which combines both sectors, down to 54.3 in July from 57.1 in June.
The reading was the weakest since March 2022, pointing to a broad-based moderation across the private sector rather than weakness confined to a single industry.
The latest PMI data spur the belief that India’s economic growth is cooling after several years of robust expansion, although activity continues to remain comfortably in expansion territory.
The survey comes just ahead of the Reserve Bank of India’s monetary policy decision, where economists overwhelmingly expect policymakers to leave interest rates unchanged while adopting a more cautious tone as inflation risks from higher oil prices remain under close watch.
SEBI Stands By New Closing Auction Despite Market Volatility
Separately, India’s market regulator signaled it has no immediate plans to review the country’s newly introduced stock closing auction mechanism after sharp swings in derivatives markets sparked criticism from traders.
According to a source with direct knowledge of the matter who spoke to Reuters, the Securities and Exchange Board of India (SEBI) believes it is too early to assess the effectiveness of the system, which was introduced on Monday to determine official closing prices for listed stocks.
The new mechanism contributed to significant volatility earlier this week, particularly on Tuesday when weekly derivatives contracts expired. Futures and options prices experienced unusually sharp movements, producing unexpected losses for some traders while creating substantial gains for others.
Arbitrage funds emerged among the biggest beneficiaries, recording sizeable one-day mark-to-market valuation gains as pricing dislocations opened temporary trading opportunities. Despite complaints from market participants that the system was not functioning as intended, the regulator expects trading conditions to normalize as participation increases.
The source said SEBI has encouraged brokers to broaden retail investor participation in the closing auction and does not have a specific timetable for reviewing the framework.
Overall, the latest PMI surveys suggest India’s economy is entering a period of slower, but still positive, growth as both manufacturing and services lose momentum simultaneously.
While easing inflation provides policymakers with room to keep interest rates unchanged for now, softer demand, weaker business confidence and slower job creation indicate that the economy is becoming more sensitive to higher global energy prices and persistent external uncertainty.
At the same time, SEBI’s decision to stand by its new market-closing mechanism signals that regulators remain focused on improving market structure despite initial volatility, betting that greater participation and increased liquidity will help stabilize price discovery over time.