The International Monetary Fund urged India to keep policy rates on hold until high inflation is on a downward trend and to take steps to boost economic growth.
The IMF's annual economic health-check of India's economy stressed that the biggest challenge for the authorities was to bring growth back to its potential and lower inflation.
Earlier on Tuesday, the Reserve Bank of India announced its first interest rate cut in three years by an unexpectedly sharp 50 basis points to boost its economy.
Some IMF directors appeared to disagree on the underlying reason for the slowdown in India, arguing that it is difficult to attribute it to economic "structural factors".
The IMF forecast that the economy would grow at about 7% in 2012 and 2013, down from the 8.4% levels of the last two years. It said inflation was projected to fall in the near term, but to stay above the Reserve Bank of India's objective.
"The main domestic risk is a further weakening of private investment if government approvals do not accelerate, reform efforts are not reinvigorated, and inflation remains high and volatile," the IMF said in a statement.
Economic reforms and fiscal consolidation were crucial to address constraints to growth and reduce inflationary expectations, the global lender said.
It said India's plans to develop infrastructure, improving access to credit and making the labor market more flexible were some measures the government could adopt to ensure the country's growth potential remains intact.
