India's services sector grew at its slowest pace in more than two years in August, throttled by feeble expansion in new business as a faltering global economy and tight domestic monetary conditions weighed, a survey showed on Monday.

The HSBC Markit Business Activity Index , based on a survey of around 400 companies, slumped to 53.8 in August from 58.2 in July, the index's biggest one-month decline since January 2009.

It was also the weakest growth since June 2009, but the index has stayed above the 50 mark that separates growth from contraction for 28 consecutive months.

"Both business activity and new business decelerated markedly in response to the lagged effects of monetary policy tightening, the elevated level of inflation and the now heightened uncertainty about the global economic outlook," said Leif Eskesen, chief economist for India and ASEAN at HSBC.

The new business sub-index fell to its lowest level in three months in August, 54.9 from July's 59.3, as dampening global economic conditions knocked orders.

Expectations for new business were also scaled back in August, suggesting the headline PMI will slow further in September.

The services sector, which includes outsourcing power-houses like Tata Consultancy Services and Infosys, has traditionally shrugged off weak global economic conditions due to its ability to take on more work at a time when companies worldwide seek to lower costs.

But there is reason for caution especially since data showed last week that manufacturing activity contracted in August in developed regions like the euro zone and Britain while growth virtually halted in giants like the United States and China.

The Indian survey also showed a reduction in service sector employment levels for the second consecutive month as new business growth slowed while input costs and output prices continued to march ahead.

The Reserve Bank of India has increased interest rates 11 times since March 2010 in a bid to rein in rampant inflation. The tightening has slowed consumer spending and hit economic growth.

"Inflation pressures remained firmly in place, with input costs increasing at a steady pace and prices charged accelerating. Inflation, therefore, remains the dominant concern, calling for a few more policy rate hikes before RBI can call it quits," he added.

India's economy grew at its weakest pace in six quarters in the three months through June, even though the official data was marginally above economists' predictions.

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