We tested out Hindi SMS by Jose Cherian and this is a perfect working Hindi language keyboard. Tested on my iPhone 3G this actually allowed me to compose and send a Semi Hindi sms and was received perfectly at the other end. Hindi SMS is a stand alone app that lets you compose your message in Hindi and/or English and then export the same to the sms.app and send to anyone. Simple! 
They Hindi keyboard as required is big enough and I managed to brush up my Hindi a little while using it!