RBI cuts FY13 GDP growth forecast to 5.7% vs 6.5%
Cuts FY14 GDP growth forecast to 6.6% vs 7%
The Reserve Bank of India said the government's reform efforts are a move in the right direction but said swift implementation and further measures are needed, and warned that inflation remains a risk, a day before it is expected to keep interest rates on hold.
Still, the RBI's language was less hawkish than in the recent past, as it said inflation pressure is likely to moderate starting in the January-March quarter, a sign it may soon be ready to ease policy interest rates after leaving them unchanged since April.
"As macro-risks from inflation and twin deficits recede further, that could yield space down the line for monetary policy to respond more effectively to growth concerns," the Reserve Bank of India wrote in its review of macroeconomic and monetary developments for the July-September quarter.
The twin deficits refer to India's fiscal and current account deficits.
The RBI said its survey of professional forecasters had lowered its median growth forecast for the fiscal year that ends in March to 5.7% from 6.5% previously, and lifted its average wholesale price index inflation forecast for the fiscal year to 7.7% from 7.3%.
"A credible fiscal consolidation strategy is now on the anvil but needs to be backed by further measures," the RBI said.
Earlier on Monday, Finance Minister P Chidambaram pledged to nearly halve India's fiscal deficit by March 2017 in a bid to avoid a credit rating downgrade and persuade the central bank to cut rates to help the ailing economy, but offered few concrete steps to meet the ambitious target.
Higher spending on fuel, food and fertiliser subsidies along with sluggish tax revenues has led many economists to forecast a fiscal deficit in the current fiscal year of about 6% of GDP. Chidambaram said India's fiscal deficit would come in at 5.3% of GDP, up from New Delhi's earlier target of 5.1%.
In September, wholesale price index inflation rose a faster-than-expected 7.8% from a year earlier, on higher fuel prices, and economists expect it to remain near 8% for the next couple of months.
India has taken several recent measures to bolster investment and ease its fiscal deficit, including raising the price of subsidised diesel and easing foreign direct investment in several industries, including supermarkets and airlines.
"The announcement of these reform measures in themselves are not sufficient to ensure recovery as their impact would critically hinge on successful implementation," the RBI wrote.