India's services sector affected due to demonetisation

The Dollar Business Bureau

Demonetisation has put an end to the 16-month expansion of India's services activity with the sector witnessing a decline in the month of November.

In totality, the seasonally adjusted Nikkei India Composite PMI Output Index has decreased from October’s 45-month high of 55.4 to 49.1 in November, reflecting a slight contraction in private sector activity.

A reading above 50 on the index reflects economic expansion whereas a figure below that indicates contraction.

According to Pollyanna De Lima, an Economist at Markit and author of the report, the ban of Rs. 500 and Rs. 1000 notes have heavily impacted the services sector with cash shortages leading to lesser new business intakes. This has ultimately led to a fall in activity and ended a 16-month sequence of expansion.

The agency had also released some data last week showing a decline in manufacturing activity due to lack of proper cash in the economy.

As per De Lima, it’s just a matter of time that the situation comes under control as disruptions are short-lived.  A lot of panelists see the market picking up with high-value banknotes being replaced and ultimately ending the operations of the black market.

De Lima also expects the Monetary Policy Committee to cut the interest rates in the backdrop of these figures. The Monetary Policy Committee, which is chaired by Reserve Bank of India Governor Urjit Patel, had also decreased interest rates 0.25% in the month of October.

There is a possibility that the RBI could cut key policy rate by up to 50 basis points, or 0.5 percentage point.