Global investment banking giant Goldman Sachs has slashed India's growth forecast for this fiscal to 7.8% on account of rise in interest rates and a rising inflation, forecast at 7.5% during the period.
The estimate is way below the government's forecast of 9% growth in 2011-12.
"We reduce our GDP growth forecasts for FY12 to 7.8% from 8.7% due to the impact of higher rates...," Goldman Sachs said in its latest issue of 'Asia Economics Analysts'.
The bank had earlier forecast that the Indian economy would expand by 8.7%, while the inflation would hover around 6.7% in 2011-12.
Goldman Sachs says the environment remains challenging, with inflationary pressures persisting into the economy. According to its latest report, recent spike in core prices suggest that the food and fuel shocks have been passed through and inflation may remain elevated in 2011.
"We are raising our inflation forecast for FY12 to 7.5% from 6.7% due to the recent large upside surprise in core prices," Goldman Sachs said.
Headline inflation has remained above 8% since February 2010. Overall inflation in March stood at 8.98%, much above the government's projection of 8%.
Food inflation remained in double digits for greater part of last fiscal, though it has shown signs of moderation since March.
Prime Minister Manmohan Singh had yesterday admitted that inflation, specially of food items, is a matter of concern for the government.
Goldman Sachs expects RBI would continue with it tight monetary policy this year to staunch the inflationary pressures.
"With inflation remaining the dominant macro concern, we think that the RBI will keep liquidity tight in order to pass through the policy rate hikes to bank deposit and lending rates...
We now expect RBI to hike policy rates by another 125 bp in 2011, significantly higher than the market expectations," Goldman Sachs said.