India's services sector activity fell to a six-month low in September, primarily due to a significant slowdown in demand amid high inflation, as per a private survey.

The S&P Global India services Purchasing Managers' Index decreased from 57.2 in August to 54.3 in September. The indicator dropped to its lowest level since March despite remaining above the 50-point threshold dividing growth from contraction for the fifteenth consecutive month – the longest run of expansion since October 2016.

The latest PMI data continue to show a strong performance for the Indian service sector despite some loss of growth momentum in September, according to Pollyanna De Lima, economics associate director at S&P Global Market Intelligence. "The Indian service sector has overcome many challenges in recent months," she said.

The new business sub-index, a gauge of demand, considerably decreased to reach its lowest level since March, but it remained over 50 for the fifteenth consecutive month. Despite the fact that the decline in September was the smallest since January, international demand, which has not recovered since the start of the pandemic, continued to fall below the 50 percent mark.

Demand slowed as companies raised their prices for a nineteenth month as they faced higher energy, food, labour and material costs.

To combat inflation and partially counteract the negative impact of the aggressive rate hikes by the U.S. Federal Reserve, which have undermined numerous currencies, including the rupee, the Reserve Bank of India (RBI) has increased interest rates by 190 basis points since May.

After the RBI tried to support the currency, foreign reserves in India fell by almost $100 billion, to $545 billion. By year's end, they were predicted to reach $523 billion, according to a Reuters survey.

"Currency instability raises additional concerns about inflation as imported goods become more expensive, and surely means that the RBI will continue raising interest rates to safeguard the rupee and restrain price pressures, noted Pollyanna De Lima, economics associate director at S&P Global Market Intelligence. In the upcoming months, "an increase in inflation might harm consumer spending, erode corporate confidence, and put the Indian service sector's resiliency to the test." 

For the fourth month in a row, hiring in the industry persisted although fewer positions were added than in August.
The optimistic future activity sub-index, which measures future activity, increased to its highest level in nearly eight years, raising anticipation for stronger growth.

The manufacturing and services sectors both shrank in response to declining demand, slowing the overall S&P Global India Composite PMI Output Index to 55.1 from 58.2 in August.

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