BENGALURU (Reuters) - Activity in India's services industry contracted for a third straight month in January, although at a slower pace, as firms struggled to recover from Prime Minister Narendra Modi's shock currency crackdown, a survey showed.
Modi's decision in November to abolish high-value bank notes removed 86 percent of the currency in circulation, hitting consumption and capital investments, and shattered traditional cash-reliant supply chains.
January's Nikkei/IHS Markit Services Purchasing Managers' Index remained below the 50 mark that separates growth from contraction, registering 48.7 compared to December's 46.8.
"India's pivotal service sector remained in contraction territory in the opening month of 2017, with both new business and activity falling for the third straight month," said Pollyanna De Lima, an economist at survey compiler IHS Markit.
"A rebound in the near term is likely as rates of reduction softened and business confidence improved on the back of hopes that market conditions will soon normalise."
The latest data, taken with a sister manufacturing survey on Wednesday which showed factory activity returned to modest growth, suggests Asia's third-largest economy is limping back to health.
To support those most impacted by demonetization, Finance Minister Arun Jaitley unveiled an annual budget on Wednesday that increased government spending and cut income and small enterprise taxes.
In an effort to drum up trade, firms continued to absorb rising costs although the new business sub-index remained sub-50 at 48.6 in January. It was 46.0 in December.
Low consumer spending brought inflation down to a more than two-year low of 3.41 percent in December, raising expectations in financial markets the Reserve Bank of India would ease policy.
India's central bank will cut 25 basis points from the benchmark interest rate at its Feb. 7-8 meeting, a Reuters poll this week said.
A separate Reuters survey last month showed a majority of economists were confident the demonetization drive would boost consumption and investment in the longer run and the business expectations sub-index in the PMI survey registered the largest month-on-month jump since April 2012.
The composite PMI, which measures both services and manufacturing, rose to 49.4 in January from 47.6 in December.
Reporting by Purnita Deb; Editing by Richard Borsuk