The HSBC/Markit purchasing managers index for the services industry today inched up to 53.6 in May, pointing to a solid expansion in output, one that was the fastest in three months. It has registered 50.7 in April, the banking major said in a statement.
A reading above 50 shows that the sector is expanding, while a reading below 50 shows that the output in the sector is contracting.
The services sector which accounts around 60 percent of the India's GDP expanded largely driven by higher levels of new work placed at private sector firms in India.
"Service sector activity picked up pace in May led by firmer order flows. Moreover, companies were more optimistic about the domestic and global economic outlook," HSBC Chief Economist for India & ASEAN Leif Eskesen said.
The level of positive sentiment was at a five-month high. Services firms expect that better economic conditions combined with increased marketing and the introduction of new services will lead to higher customer numbers.
The growth in the services sector contrasted with a fall registered in manufacturing output, the first decline in 50 months.
Earlier this week the HSBC/Markit manufacturing PMI showed that the manufacturing sector output fell in May, its first decline since March 2009, as order flow weakened and power outages affected the sector.
Accordingly, the HSBC India Composite Output Index, which maps both services and manufacturing activity posted 52 in May, up from 50.5 in April.
"The latest reading signalled the fastest increase in business activity since February, but a rate of growth that remained historically muted," HSBC said.
India's Economic growth rate slipped to a decade low of 5 percent in 2012-13 on account of poor performance of farm, manufacturing and mining sectors.
Eskesen further said that "notwithstanding the uptick in growth, inflation gauges eased further on the back of strong competition and moderating cost pressures. With growth still moderate and inflation softening, the probability of another RBI rate cut has increased."
Meanwhile, overall employment growth across the Indian private sector was slight and unchanged from April. Slight rises were signalled in both the manufacturing and service sectors.