India's services sector grew at its strongest pace in three months during December, as company order books filled at the quickest rate since last February, a survey showed on Friday.

Services, ranging from banks to restaurants, make up nearly 60 percent of India's economic output and a recovery brightens the outlook for Asia's third-largest economy. The sector has been the lone bright spot in an otherwise slowing economy.

The HSBC services Purchasing Managers' Index, a survey of around 400 companies, rose to 55.6 in December from November's 52.1.

The 50 mark separates growth from contraction and the index has held above that level for over a year now.
"The service sector provided some holiday cheer with activity fully recovering after two months of deceleration, led by a sharp rise in new business," said Leif Eskesen, economist at HSBC. The new business sub-index jumped to 57.1 in December from 54.9 in the previous month.

While there is strong overseas demand for Indian services, the big questions remain about major export markets. The US economy will remain sluggish in 2013, underscoring a very fragile world economic outlook, according to a poll.

Firms were still optimistic about the year ahead, although the business expectations sub-index nudged lower in December from the previous month.

The Indian economy grew 5.3 percent from a year earlier in the quarter to September, extending a slowdown that began at the start of this year. It is now headed for its weakest full year growth in a decade.

The survey showed both input and output prices rose at a slower pace during the month. That should take some steam off the headline inflation rate, which at 7.24 percent in November is well above the Reserve Bank of India's commonly perceived 5 percent comfort level.

"Inflation readings, meanwhile, eased a bit. With growth showing signs of recovery and inflation still elevated, the case for a policy rate cut is not yet convincing," Eskesen added. "However, the RBI has clearly teed up for rate cuts in January-March."

The central bank has held interest rates steady since April, citing high price pressures, even as financial markets and the government have clamoured for rate cuts.

But after the RBI's meeting last month and in October, it said it was likely to ease policy rates in the January-March quarter, as inflation pressures are expected to ease.

A majority of economists polled last month expect a total of 50 basis points of cuts in the benchmark repo rate by March, citing weak growth and a generally declining inflation trend.

A PMI survey released on Wednesday showed India's manufacturing activity surged to a six-month high in December, boosted by strong factory output and a spike in new orders.


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