Latest PMI figures indicate more gloom for India’s economy

The Indian rupee could weaken towards 63 against the dollar followed by a further slide to 65 in the coming weeks, one forecast noted. Dhiraj Singh / Bloomberg News

The latest batch of economic data out of India points to sustained rupee weakness – a key issue for hundreds of thousands of Indian expatriates across the Arabian Gulf.

India's service sector activity contracted in October for the fourth consecutive month, with the latest data underlining a continued weak economic environment.

The HSBC India Services Purchasing Managers’ Index came in at 47.1 last month – a reading below 50 indicates a contraction. The purchasing managers’ index is a key measure of the health of a country’s business activity, covering areas such as services, retail and manufacturing.

“The latest reading indicated a fourth successive monthly contraction of service-sector output across India,” HSBC said. “Sector data indicated that business activity fell in five of the six categories monitored by the survey, with the sharpest decline noted at hotels and restaurants.”

The report said that anecdotal evidence suggested that “worsening client confidence, economic instability, competitive pressures and Cyclone Phailin”, which hit the country’s east coast last month, all contributed to a decline in new work.

The rupee fell to a series of record lows over the summer as funds flowed out of the country on expectations of the United States Federal Reserve winding down its quantitative easing programme as well as concerns about India’s gaping current account deficit.

The currency has recovered some of the losses in recent weeks but it remains weak – trading down more than 12 per cent against the dollar at 61.65 yesterday afternoon compared with levels at the beginning of the year. Data such as the latest service sector activity figures do not bode well for the economy and the rupee, say analysts.

“The less than expansionary numbers come as no surprise. India is still dogged by higher price pressures and weak demand, both globally and domestically,” said Gaurav Kashyap, the head of futures at Alpari, a global online currency and commodity broker. “These domestic factors will keep any gains for the rupee in check.”

Mr Kashyap forecasts the rupee could weaken towards 63 against the dollar followed by a further slide to 65 in the coming weeks.

The Reserve Bank of India (RBI) last week said it expected the economy to grow at just 5 per cent in the current financial year, which runs until the end of March.

That figure is the same as India’s decade-low growth in the last financial year. It is well below the levels of about 8 per cent that the country needs to create jobs for the increasing number of citizens entering the workforce.

Figures released on Friday also showed a contraction in the manufacturing sector.

“The continued contraction in service-sector activity is testament to the dampening effects of the heightened macroeconomic uncertainty, which is making businesses and consumers more cautious about spending,” said Leif Eskesen, HSBC’s chief economist for India and Asean (the Association of South East Asian Nations).

The services PMI reading last month was an improvement on the four-and-a-half year low of 44.6 that it hit in September.

“While activity readings may be stabilising, a notable recovery is not in the cards for a while still,” Mr Eskesen said. “Despite the weak growth backdrop, the RBI has to keep its inflation guards up to address the lingering inflation pressures.”

Last week, the central bank raised the benchmark interest rate by 25 basis points for the second consecutive month in a effort to fight inflation.

Data out of the US could also have implications for the rupee this week.

“We are keeping a close eye on some key data from the US at the end of this week – third-quarter GDP is expected to have fallen below 2 per cent following the US government shutdown and Friday’s payrolls are also expected to come in below 130,000,” said Mr Kashyap.

“These weaker than expected figures will lend further support to the dollar in the weeks ahead and this will weigh heavily on higher-yielding assets and the Indian rupee,” he added.

Next year, there would be additional factors that would influence the direction of the rupee, he said. “A year filled with heightened levels of volatility and uncertainty for the rupee with the Indian elections and expected taper from the FOMC [America’s Federal Open Market Committee] towards the end of the first quarter.”

The softness in the rupee has led to a surge in remittances from countries including the UAE, as workers take advantage of the exchange rate.

UAE Exchange, a money transfer company, said remittances by non-resident Indians reached a new high of more than US$6.5 billion in the first nine months of the year and were expected to hit $8.5bn for the whole year.