Service sector activity slowed last month to the lowest level since April 2014 in what sends a poor signal about the biggest contributor to the Indian GDP and thereby the economic prospects in the country.
A reduction in new orders shrunk the reading of service sector activity to 49.6 in May against 52.4 in April, as measured by the HSBC Purchasing Managers' Index. Calculated on a seasonally adjusted basis, it has now shrunk to its lowest level in 13 months.
PMI, compiled monthly by global bank HSBC, measures economic health of a sector based on surveys of private sector companies. A reading of below 50 on the index denotes contraction.
"Restrained demand accompanied by sweltering heat and the earthquake led to falling new work. Nonetheless, the sector is expected to see a rebound in coming months, as these factors fade away," said Pollyanna De Lima, economist at Markit.
A separate report on the state of manufacturing sector released by HSBC early this week indicated manufacturing activity gathering pace as new orders increased at a fastest pace since January.
While PMI reports indicate Indian economy has been expanding for the past few months, the growth in both services and manufacturing hasn't translated into higher employment figures. The report highlighted that employment levels increased despite the weaker service sector activity.
"An upturn in employment combined with improved business confidence further add to the evidence that prospects may brighten," Lima added.
Another cause of concern is that service sector inflation rose to the highest level in 13 months. The report highlighted that with cost inflation also accelerating at the manufacturers end, the overall increase in costs across the private sector quickened.
The composite PMI, which captures both manufacturing and service sector activity, skid to a seven-month low of 51.2 in May. With the RBI trimming the monetary policy rate by 25 bps in its Tuesday meeting, now it is to be seen how the rate cut propels the economy.