India services sector cuts jobs in February despite confidence about future

India's services sector lost momentum in February and firms shed workers for the first time in three months despite growing more confident about the year ahead, a business survey showed on Monday.

HSBC's Business Activity Index, compiled by Markit and based on a survey of around 400 firms, fell to 56.5 in February from 58.0 in January.

The employment sub-index slipped below the 50-mark separating growth from contraction for the first time since November, reflecting similar trends in the factory sector during the month.

Despite the month-on-month drop in the headline services number, the sector grew for the fourth straight month in a row in February.

And the confidence index regarding future business inched up to a new eight-month high of 71.7 in February from 71.2 in January.

"Activity in the service sector expanded at a slightly slower clip in February, but a continued strong increase in new business and an uptick in the sentiment gauge suggests that activity will remain well-supported in the months ahead," said Leif Eskesen, economist at HSBC.

But not everything is likely to be rosy ahead.

India's relatively dismal economic growth of 6.1 percent in the three months to December, its slowest pace in almost three years, showed that economic weakness has spread from the factory sector to the services sector.

With growth in Asian economies expected to slow further in the first quarter of the calendar year, India may face more economic turbulence in the coming months.

Inflation, which has refused to come down from lofty levels despite numerous rate hikes by the Indian central bank over two years, has been one of the country's major economic hurdles.

But a fall in the wholesale price index to its lowest level in over two years in January, together with the gloomy economic outlook, gave ample reason for expectations of policy easing by the Reserve Bank of India (RBI).

A majority of economists polled by Reuters in January expect the RBI to cut its key interest rate by the end of June with 8 of 22 forecasting a rate cut in March.

The slowdown in price increases was reflected in February's service sector survey, with prices charged rising at the weakest pace in eight months.

However, the recent spike in oil prices may dampen expectations for policy easing by threatening to push inflation higher again.

"As service sector activity is expected to stay relatively brisk and inflation is likely to hover above the comfort zone, the RBI will have to approach the easing cycle cautiously. In addition, oil prices could have an impact on the timing as well as speed of rate cuts," HSBC's Eskesen said.