The Reserve Bank on Tuesday trimmed the economic growth projection for the current fiscal to 5.5 per cent, from 5.8 per cent estimated earlier and said it was necessary to arrest the decline in growth as inflation risks moderate.
"While the series of policy initiatives by the government has boosted market sentiment, it will take some time to reverse the investment slowdown and reinvigorate growth.
Accordingly, the baseline projection of GDP growth for 2012-13 is revised down from 5.8 per cent to 5.5 per cent," RBI said in its third quarter monetary policy review.
The growth estimate of 5.5 per cent is lower than 5.7 per cent projection by the government, which would be the lowest growth recorded in a decade.
It had in October lowered the GDP forecast for the current fiscal to 5.8 per cent, from 6.5 per cent in July.
"The key to stimulating growth is a vigorous and sustained revival in investment," RBI said, adding that achieving this would require bridging the infrastructure gap, fast tracking project clearances and improving governance.
The RBI on Tuesday lowered key policy rates and Cash Reserve Ratio by 0.25 per cent, thereby releasing additional liquidity of Rs 18,000 crore (Rs 180 billion) into the system.
"It is critical now to arrest the loss of growth momentum without endangering external stability," it said.
The government has recently taken a host of reform initiatives, including liberalisation of FDI in some sectors like multi-brand retail, amending the Banking Regulations Act and partial deregulation of diesel prices.
Further, the RBI also lowered the March-end inflation projection to 6.8 per cent, from 7.5 per cent estimated earlier.
It, however, expected that inflation would remain range bound around current levels due to persistent food inflation and pass through of diesel price adjustments.
"This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks," the RBI said. December WPI inflation fell to 7.18 per cent, but was higher than the RBI's comfort level of 5-6 per cent.