Chesapeake & Potomac Telephone Co. of Maryland was granted a 2.5 percent rate increase yesterday -- less than one-tenth of the 25 to 28 percent increase that the company originally requested last August.

The C&P rate increase, granted by the Maryland Public Service Commission, means that each Maryland residential customer's basic local phone bill will increase by about 40 cents a month, far less than the approximately $4 a month that C&P had requested.

The increase will produce $28.6 million in additional revenue for the phone company rather than the $123 million C&P had asked for.

"This is a significant decision in favor of consumers in Maryland," said Fred Hoover, assistant Peoples' Counsel. "This is a big step forward."

C&P of Maryland, which has 1.58 million residential subscribers and 120,000 business customers, reduced its original proposal by $4.3 million to $118.7 million in February. Hoover said that the company "did not prove to the commission's satisfaction that they were in such financial condition that they deserved such a drastic increase in rates."

"We think it's an extremely bad decision for the company and our customers," said Frank Just, spokesman for C&P. "We're concerned about the impact that this decision will have on our customers' future telecommunications needs."

As a result of yesterday's decision, installation charges will rise from $18 to $26 for residential customers and from $27 to $32 for business customers. Telephone ordering charges will rise from $19 to $22 for residential customers and from $30 to $38 for business customers. The cost of a telephone call from a pay phone will rise from 20 cents to 25 cents.

The last Maryland C&P rate increase, which amounted to $168 million in additional revenue for the company, was $5 a month in January, 1984.