India’s economic activity slowed to its weakest pace in more than four years in July, led by the services sector, as renewed Middle East tensions weighed on demand and intensified inflationary pressures. The composite index fell to 54.3 in July from 57.1 in June, its lowest reading since March 2022, as both the services and manufacturing gauges weakened, a flash survey by HSBC Holdings Plc showed Friday.
The indexes, reflecting business confidence in the economy, are based on preliminary surveys. The data may be revised when final PMI figures are released next week. A reading above 50 indicates expansion in economic activity, while a print below that indicates contraction.
The services sector accounts for nearly 60% of India’s economy, making it the main driver of growth. The industry is also facing pressure from weaker overseas demand and higher US visa costs for Indian software firms.
Risks to India’s economic outlook have increased as a truce between the US and Iran remains elusive, raising the prospect of prolonged geopolitical tensions and higher energy prices. The Reserve Bank of India said this week that while high-frequency indicators point to resilient demand, renewed uncertainty in the Middle East and deficient monsoon rains remain key threats to growth.
With oil prices climbing again, sustained gains could inflate India’s fuel import bill, putting pressure on the rupee and adding to imported inflation for the world’s third-largest oil importer.
India’s central bank has kept its benchmark interest rate unchanged at 5.25% this year as it seeks to contain inflation while supporting economic growth. Economists widely expect policymakers to leave rates on hold again at their next meeting on Aug. 5.
Firms are increasing inventories and other buffers to guard against persistent supply disruptions stemming from renewed geopolitical tensions, Pranjul Bhandari, chief India economist at HSBC said in a statement.
The moderation in growth was centered on the services economy, where expansions in new orders and output eased to their weakest in 53 months, while the manufacturing sector recovered some momentum, the survey showed.
“The softness is likely concentrated in domestically oriented services, pointing to some moderation in urban discretionary demand,” said Madhavi Arora, an economist at Emkay Global Financial Services Ltd. Still, supportive employment and export orders suggest the “underlying services cycle is cooling, but not cracking,” she said.
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