Business activity in India contracts again in June on weak demand

By Reuters

Jul 03, 2015 10:19 AM EDT

India's dominant services industry contracted for a second month in June as new business again declined, suggesting Asia's third-largest economy is struggling to maintain growth, a survey showed on Friday.

Any weakness in the economy, alongside subdued inflation, will likely add to expectations the Reserve Bank of India will ease monetary policy sooner rather than later.

The Nikkei Services Purchasing Managers' Index, compiled by Markit, dropped to a 15-month low of 47.7 in June from May's 49.6, well below the 50-level that separates growth from contraction.

Five out of the six industries monitored reported falling activity and the new orders index sank to 47.3, its lowest level since December 2013.

Weak demand also curtailed factory growth, a sister survey showed on Wednesday.

"June's Indian service sector data disappointed," said Pollyanna De Lima, an economist at Markit.

"All in all, latest data suggest that the Reserve Bank of India's commitment to support economic growth may result in further rate cuts at its August meeting," she added.

At the latest meeting in June, Governor Raghuram Rajan left the door open to a further cut from 7.25 percent if inflation remains subdued.

The survey showed prices rose at a slower pace last month, and as retail inflation has plunged since January 2014 the RBI has had room to cut its key interest rate three times already this year.

Still, according to a Reuters poll conducted after last month's cut, the RBI is expected to wait until at least October, after the vital monsoon rains, to reduce rates again.

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