The HSBC Services Purchasing Managers' Index (PMI), compiled by Markit, fell to a three-month low of 47.5 in March from 48.8 in February, chalking up its ninth straight month below the 50-mark that separates growth from contraction.
"Following some stabilization in recent months, service sector activity weakened again in March led by softer domestic demand," said Leif Eskesen, chief economist for India & ASEAN at HSBC.
New business fell at a faster pace - the sub-index was at 47.6 in March, down from February's 49.5.Firms increased headcount for the fourth month after building up a small amount of outstanding business and were the most optimistic about the future than they have been since July.
Persistently high inflation has pushed the central bank to increase interest rates three times since September, although price pressures eased in February.
The Reserve Bank of India kept its main refinancing repo rate unchanged this month after inflation dipped and the Governor cited a downward risk to his growth estimate of 5-6 per cent this fiscal year.
"Growth is expected to remain subdued in coming months, but pick up gradually during the second half of 2014. This, however, assumes that the election outcome provides the elected government with a workable mandate," Eskesen said.