India’s services economy lost momentum for the second consecutive month in March, growing at its slowest pace of expansion in more than a year as demand slowed and inflation pressures persisted amid the ongoing war in Iran.
The HSBC India Services Purchasing Managers’ Index compiled by S&P Global fell to 57.5 last month from 58.1 in February. While the reading remains above the 50-mark that separates expansion from contraction, it represents the softest rate of expansion since January 2025.
The slowdown reflects a slowdown in new business arrivals, which have fallen to a 14-month low. Survey participants noted that market volatility and the lingering effects of geopolitical tensions in the Middle East reduced domestic demand, impacting tourism and broader commercial activity.
export engine speed increased
Despite the domestic slowdown, India’s service providers witnessed growth in international demand. New export orders grew at the fastest pace since mid-2024, with markets in Asia, Europe and the US reporting broad-based gains.
“Demand remained resilient on the back of new export orders,” HSBC chief India economist Pranjul Bhandari said in a statement. “Thus, service providers’ expectations for future activity remained positive.”
The gap between the decline in domestic sales and the pick-up in overseas demand suggests that India’s services engine is increasingly leaning on global markets to offset local fatigue.
Inflation headwinds
The primary concern for policymakers will be the sharp increase in operating expenses. Input cost inflation rose at the fastest pace in almost four years due to a broad-based rise in prices of fuel, electricity and essential food items including meat, vegetables and cooking oil.
In response, service providers raised their selling prices at the fastest rate in seven months to protect margins. Consumer services saw the most aggressive increase in input costs, while the finance and insurance segment led the way in increasing charges for end users.
“Input cost inflation rose at the fastest pace since 2022, indicating that higher fuel, transportation and logistics costs are impacting services,” Bhandari said.
labor market flexibility
The cooling activity has yet to have an impact on the labor market. In a sign of corporate confidence, job creation has reached its strongest pace since mid-2025. Companies reported hiring for the third consecutive month, driven by the highest level of business optimism in nearly 12 years.
Companies attributed this “upbeat” outlook to aggressive advertising campaigns and expectations of improving domestic market conditions.
overall weakness
There were also signs of slowdown in the broader economy. The HSBC India composite PMI output index, which weighs both manufacturing and services, fell to 57.0 from 58.9. This is the weakest private sector expansion in nearly three and a half years.
While manufacturers have seen a slight improvement in international demand, the overall data reinforces the story of a cooling economy battling “sticky” inflation and a domestic market that is finally beginning to feel the brunt of higher costs.