Business activity in India's services sector grew at a faster clip in January than in the previous month, boosted by new orders and expectations of solid growth, but costs also soared, a survey showed on Thursday.

The HSBC Markit Business Activity Index, based on a survey of around 400 firms, rose to 58.1 in January after falling to 57.7 in December from November's four-month high.

It was the 21st consecutive month the key index of the service sector in Asia's third largest economy has been above the 50 mark that separates growth from contraction.

India's service sector saw a slight acceleration in the momentum in January, with activities, orders, and employment growing a bit faster and readings staying firmly in expansionary territory, said Leif Eskesen, chief economist for India & ASEAN at HSBC.

The PMI's employment index and the business expectations index climbed to their highest in seven months, indicating Indian firms were more optimistic about the year ahead.

However, the input price index hit a 30-month high of 61.99 in January and prices charged were at a nine-month high, underscoring the threat that higher raw material prices are rapidly filtering into the broader economy, fueling inflationary pressures.

As we saw for the manufacturing sector, however, the supply side is struggling to keep pace with the strong momentum in domestic demand, which is manifesting itself in accelerating input prices and is spilling over to prices charged, Eskesen said.

India's manufacturing sector expanded at a slightly faster pace in January but input prices jumped, adding to pressure from food inflation that the government and central bank are already struggling to contain.

The current strong pace of activity is clearly not compatible with comfortable and stable levels of inflation, underscoring the urgency of continued monetary policy tightening and the need to prepare a budget for the next fiscal year, which is consistent with an appropriately contractionary fiscal policy stance, Eskesen said.

India's central bank raised interest rates on Jan. 25 by a quarter of a percentage point, bringing the repo rate to 6.5 percent, in an attempt to suppress stubborn inflation. The increase was its seventh rate rise over the past year and more hikes are expected to follow later in 2011.

The Reserve Bank of India has lifted inflation projections for March 2011 to 7 percent.

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