India's service activity expanded in December at the fastest pace in the last three months, according to the HSBC Services Purchasing Managers’ Index (PMI) released Friday.

The Services PMI, a measure of the nationwide service activity, was 55.6 in December, up from 52.1 in November, signaling a sharp expansion.

“The service sector provided some holiday cheer with activity fully recovering after two months of deceleration, led by a sharp rise in new business. The additional workload also led to a rise in outstanding business. Inflation readings, meanwhile, eased a bit. With growth showing signs of recovery and inflation still elevated, the case for a policy rate cut is not yet convincing. However, the RBI has clearly teed up for rate cuts in January-March,” Eskesen, chief economist for India & ASEAN at HSBC, said in a note.

Significantly, the index remained in the expansion zone, a reading above 50. The expansion of the service activity should alleviate fears about a sharp retardation of the Indian economy. “Optimism was signaled by service providers in India during December. Approximately 46% of monitored companies expect overall activity to increase in the upcoming year, and they mentioned anticipated rises in demand, the launch of new projects and increased advertising,” Markit said in a note. 

Earlier this week, it was reported that India's manufacturing activity expanded in December at the fastest rate in six months, according to the HSBC Manufacturing PMI. The reading of the HSBC Manufacturing PMI, a measure of the nationwide manufacturing activity, rose to 54.7 in December compared to 53.7 in November.

The HSBC India Composite Output Index rose to 56.3 in December from 53.2 in November. “The rate of expansion was sharp, and the fastest since February. Manufacturers and service providers both signaled increases in output, with rates of growth quickening in both sectors,” Markit added.

There have been fears of a hard landing after last month the Indian government lowered the country’s economic growth forecast for the fiscal year 2012, indicating that stimulus measures are needed to boost the weakening economy. According to the mid-year economic review released in December by the Finance Ministry, India’s economy is expected to expand between 5.7 and 5.9 percent in the fiscal year 2012, down from the earlier estimate of 7.6 percent.

Investors worry that even this rate can turn out to be too optimistic with the global economic condition worsening, which will have a significant negative impact on the output, inflation and budget.