The HSBC India Composite Output Index, which maps both services and manufacturing, stood at 50.3 in February, slightly higher than 49.6 in January, indicating a fractional rate of expansion.
The latest growth was centred on the manufacturing sector, HSBC said. A PMI reading above 50 indicates growth while a lower reading means contraction.
The HSBC services business activity index rose from 48.3 in the previous month to 48.8 in February.
"Service sector activity continued to stabilise, but the PMI reading remains below the water line and point to weak growth conditions," HSBC Chief Economist for India & ASEAN Leif Eskesen said.
Weaker demand, a fragile economy and competitive pressures led to a decline in new business placed with Indian services firms, HSBC said.
On price rise the survey said that while inflation for input prices eased a bit, it picked up for prices charged as businesses passed on higher costs to clients.
The annual rate of inflation, based on the monthly wholesale price index, eased to a seven-month low of 5.05 per cent in January.
"Despite the weak growth backdrop, the RBI will have to keep its inflation guards up to address lingering inflation pressures," Eskesen said.
Reserve Bank of India (RBI) Governor Raghuram Rajan had raised the key policy rate by 0.25 per cent to 8 per cent in the third quarter review of monetary policy in a bid to curb inflation.
After Rajan took over as RBI Governor in September, the apex bank increased the key policy rate three times by 0.25 per cent each.
Moreover, fiscal policy tightening to meet the deficit target will hold back government spending. This suggests that growth will remain subdued in coming months, Eskesen added.
Services sector PMI slump moderates to 48.8 in Feb
(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."