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 U.S. economy will remain sluggish in 2013, underscoring a very fragile world economic outlook, according to a Reuters 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 by Reuters 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.

HSBC India services PMI jumps to 3-mth high in Dec

New Delhi, Jan 4 (PTI) India's services sector expanded further in December registering the fastest pace of growth in three months - driven by a sharp rise in new business orders, an HSBC survey said.

The HSBC's Services Purchasing Managers Index (PMI) for December stood at 55.6, up from 52.1 in the previous month, signalling a sharp expansion in activity.

"The services sector provided some holiday cheer with activity fully recovering after two months of deceleration, led by a sharp rise in new business," HSBC Chief Economist for India and ASEAN Leif Eskesen said.

The index had witnessed significant decline in the previous two months – October, November. It had registered the fastest pace of growth in seven months in September.

The index has remained above the 50-mark which indicates expansion since November 2011.

Going forward, service providers in India are optimistic about the business outlook. Around 46 per cent of monitored companies expect overall activity to increase this year, and anticipate rises in demand, the launch of new projects and increased advertising, HSBC said.

Earlier, an HSBC survey had shown that India's manufacturing sector growth improved further in December, registering the fastest pace in six months, driven by a strong pick up in new orders.

Accordingly, the HSBC India Composite Output Index – which maps both the manufacturing and services index – stood at 56.3 in December, up from 53.2 in November, registering the fastest pace of expansion since February.

The report further noted that additional workload also led to a rise in outstanding business.

On prices, HSBC said inflation reading eased a little, as rates of input and output price inflation at private sector firms have declined.

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

Inflation as measured by all indices has remained elevated and Wholesale Price Index-based inflation has remained above RBI's comfort zone of 5-5.5 per cent for nearly three years now.

In the mid-quarter monetary policy review on December 18, RBI kept key interest rates unchanged.