Growth in the Indian services sector slipped to a five-month low in March as optimism about the business outlook in the coming year faded to its weakest level since 2009, a survey showed on Wednesday.

The HSBC Markit Business Activity index fell sharply to 52.3 in March from 56.5 the previous month, though it remained above the 50 level that divides growth from contraction for a fifth month.

Growth of new business, which had powered the modest rise in activity until now, eased and future expectations dipped. The survey compiler pointed to anecdotal evidence that the budget dampened sentiment about growth prospects for the economy.

The troubled UPA government, faced with a slowing economy and a ballooning budget deficit, avoided bold reforms in its annual budget on March 16, instead opting for cautious steps to shore up growth.

"Activity in the service sector decelerated notably in March, although it is still expanding. New business also ticked in at a slower pace and the sentiment gauge took a dive," said Leif Eskesen, an economist at HSBC.

Meanwhile, input prices and prices charged to consumers inched up in March, suggesting February's increase in headline inflation, the first in five months, might be repeated when the March data comes out.

The wholesale price index, India's main gauge of inflation edged up to 6.95 per cent in February from a year earlier, driven by a surge in food prices.

"With inflation pressures still firm, the (Reserve Bank of India) will have to approach the easing cycle cautiously, and it may have to stay on the sidelines if the inflation outlook does not improve significantly soon," Eskesen added.

With inflation picking up again, market watchers are divided over prospects for an interest rate cut. The RBI was expected to start easing rates by end-March to spur flagging growth, but that timing has now been pushed back to later in the year.

The central bank has kept its main lending rate, the repo rate, at a three-year high of 8.5 per cent since December to clamp down on inflation, but has cut banks' cash reserve requirements by 75 basis points to ease tight liquidity.

Despite evidence that a slew of rate hikes since late 2010 is hurting growth in Asia's third-largest economy, the central bank has said that its hands are tied in the absence of credible fiscal consolidation.

The government expects the economy will grow by 7.6 per cent in fiscal 2012/13, up from 6.9 per cent in the current year, the lowest in almost a decade excluding the global financial crisis in 2008.

Indian manufacturing activity displayed a similar weakening trend by slowing for the third straight month as new orders fell and cost of raw materials rose, even as it has shown growth for three years.

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