Uncomfortably high inflation coupled with supply constraints is impacting India's growth that has slowed to 4.4 per cent in the April-June quarter this year, global credit rating agency Moody's has said.
Over the past two years, India's GDP growth rate has halved from a peak of 9.2 per cent (year-on-year) in the first quarter of 2011, to 4.4 per cent in the second quarter of 2013, Moody's Analytics said in a report.
While inflation has fallen during this period, it still remains "uncomfortably high", it said. The wholesale prices increased 6.1 per cent y-o-y in August.
India's chronic inflation problem, in the face of slowing economic growth, "suggests that the economy is bumping up against supply constraints", the report said.
"This may explain why Raghuram Rajan's first monetary policy decision was to raise the benchmark repo rate by 25 basis points to 7.5 per cent," it said.
Rajan's move, the report said, is "reminiscent of Paul Volcker's term" at the US Federal Reserve, "when he tightened monetary policy to the point of sending the U S economy into a deep recession in the early 1980s".
It added: "Slower economic growth may also serve to concentrate the minds of recalcitrant parliamentarians to embrace the reform ideas of Governor Rajan and Prime Minister Manmohan Singh."
It also said the appointment of Rajan as governor of the central bank is just the latest sign of renewed reform momentum in India.
The government cut fuel subsidies in late 2012 and reformed the retail and aviation sectors by allowing foreign investment there and the partial privatisation of a number of state enterprises.
"The financial sector is next in line for a shake up, and Dr Rajan is reportedly in charge of drafting up reform plans. These may include allowing the creation of small private banks and the exit of state-run underperformers," Moody's Analytics said.