Business activity among Indian services companies expanded at its fastest pace in 16 months

RELATED ARTICLES CEOs lose confidence in growth but optimistic on own business

in January, rising for a second straight month on sharp increase in new work orders, a survey showed.

The HSBC Markit Business Activity Index, based on a survey of 400 firms, rose to 58.96 in January, its highest since September 2008, after rising to 57.41 in December.

This is the second successive rise in the index, which has been above 50 that separates expansion from contraction for nine months as the economy shakes off the impact of the global slowdown.

Before that, it had shrank for six months, hitting a trough of 40.3 in February last year.

"The key business activity index continued its march deeper into expansionary territory in January and is once again consistent with double-digit output growth in India's service sector," said Robert Prior-Wandesforde, senior Asian economist at HSBC.

"With the manufacturing PMI also strengthening further over the last couple of months the ex-agriculture segment of the economy looks to have well and truly shaken off the spillover effects from a drought-ravaged agricultural sector," he said.

India's manufacturing in January grew at its fastest pace in almost 1-½ years, boosted by a sharp rise in new export orders that underpin a recovery in the industrial sector, the HSBC Markit survey showed.

The business expectations sub-index snapped a two-month fall and rose to 66.58 in January from 65.56 in December.

Favourable market conditions, advertising campaigns and strong reputations for quality were the key reasons for positive sentiment given by respondents, HSBC said.

"However, compared with the series trend, optimism regarding future activity levels remained relatively weak," it added.

The Reserve Bank of India surprised markets by raising banks' cash reserve requirements by more than expected on Friday and warned of mounting inflation, setting the stage for increasing interest rates in the coming months.

"After a relatively soft quarter of GDP growth in October-December last year, we expect the economy to be back on track in the final quarter of the fiscal year and expand 8.5 percent in 2010/11," Prior-Wandesforde said.

He said stronger growth was pushing up prices in manufacturing and services, with companies citing rising wages as a contributing factor. All this could put upward pressure on interest rates.

"In our view a repo/reverse repo rate rise in not too far away," he said.

The repo rate, now 4.75 percent, is the Reserve Bank's short-term lending rate, while the reverse repo of 3.25 percent is the rate at which it absorbs excess funds from banks.