Services activity slump moderates in Feb; orders fall

Bangalore (Reuters) - The contraction in India's services sector moderated last month but new business declined and input prices rose, a business survey showed on Wednesday.

The HSBC Services Purchasing Managers' Index (PMI), compiled by Markit, rose to 48.8 in February from 48.3, but remained stuck below the 50 mark that separates growth from contraction for the eighth month.

India's services sector accounts for about 60 percent of gross domestic product. The weak PMI follows lower-than-expected GDP growth of 4.7 percent at the end of 2013, suggesting there may be worse to come for the economy as India heads into an election due by May.

"The PMI reading remains below the water line and points to weak growth conditions," said Leif Eskesen, chief economist for India & ASEAN at survey sponsor HSBC.

Indeed, hiring remained muted and all 22 economists polled by Reuters last week said they don't expect any substantial improvement in investment before the general election.

As new business orders shrank for an eighth month firms focused on completing existing work and barely increased headcount - the employment sub-index slipped to 50.1 from 50.9.

But firms did pass on higher costs to clients, suggesting consumer price inflation, which was at 8.79 percent in January, could rise further.

The Reserve Bank of India (RBI) has unofficially started targeting consumer prices to frame its policy and signs of faster rises will pressure the central bank to hike rates again.

However, at its January policy meeting, the RBI said if inflation eases as projected, it does not expect further tightening of policy in the near-term.

But HSBC's Eskesen said risks to inflation remain: "Despite the weak growth backdrop, the RBI will have to keep its inflation guards up to address lingering inflation pressures."

(Reporting by Anu Bararia; Editing by Eric Meijer)