The S&P Global India Services Purchasing Managers' Index rose to 59.2 in June from 58.9 in May, its highest since April 2011 and above the 50-mark separating growth from contraction. A Reuters poll had predicted a dip to 58.7.
A sharp upturn in demand, increased sales and favourable economic conditions kept the new orders sub-index above the breakeven mark for an eleventh month and drove it to its highest reading since February 2011.
"Demand for services improved...supporting a robust economic expansion for the sector over the first quarter of fiscal year 2022/23 and setting the scene for another substantial upturn in output next month," said Pollyanna De Lima, economics associate director at S&P Global Market Intelligence.
Despite falling to a three-month low in June, input cost inflation remained elevated compared to historical levels due to higher costs for chemicals, food and petrol.
Firms continued to pass on the additional costs to consumers and the prices charged index was at a near five-year high. The transport and information and communication industries posted the sharpest rise in selling prices, S&P Global said.
Persistently high inflation, alongside concerns over the weakening rupee currency, dampened optimism. The future activity sub-index was a little down from May, remaining below its long-run average.
"Unrelenting inflation somewhat concerned service providers, who were cautious in their forecasts," added De Lima.
The Indian rupee has tumbled to record lows against the U.S. dollar in recent weeks as more hawkish policy moves were expected from the U.S. Federal Reserve this year.
India's central bank is expected to raise interest rates again soon after hikes of 50 basis points in June and 40 bps in May to prevent growing inflationary pressure from becoming broad-based.
Firms hired additional staff in June to meet demand, although the rise in employment was marginal and only the second increase in seven months.
The overall S&P Global India Composite PMI Output Index was strong at 58.2, slightly down from 58.3 in May as the buoyant services industry offset slower growth in manufacturing. The factory PMI fell to a 9-month low in June.
(Reporting by Shaloo Shrivastava; Editing by Kim Coghill)