The Reserve Bank on Thursday sharply lowered the growth forecast for the current financial year to 5 per cent from the earlier estimate of 6.1 per cent on account weak domestic and external demand.
India's economic growth according to government data has slipped to over six-year low of 4.5 per cent in the second quarter of the current fiscal mainly due to contraction in manufacturing sector output.
"Real GDP growth for 2019-20 is revised downwards from 6.1 per cent in the October policy to 5.0 per cent, 4.9-5.5 per cent in H2 (this fiscal) and 5.9-6.3 per cent for H1(2020-21)," RBI said in its fifth bi-monthly monetary policy review.
While improved monetary transmission and a quick resolution of global trade tensions are possible upsides to growth projections, a delay in revival of domestic demand, a further slowdown in global economic activity and geo-political tensions are downside risks, it said.
On the positive side, however, it said, monetary policy easing since February 2019, and the measures initiated by the government over the last few months are expected to revive sentiment and spur domestic demand.
The rate setting Monetary Policy Committee noted that economic activity has weakened further and the output gap remains negative.
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However, several measures already initiated by the Government and the monetary easing undertaken by the Reserve Bank since February 2019, are gradually expected to further feed into the real economy, it said.
"Data on corporate finance and on projects sanctioned by banks and financial institutions suggest some early signs of recovery in investment activity, though its sustainability needs to be watched closely. The need at this juncture is to address impediments, which are holding back investments," it said.