India under pressure as outlook cutJune 18, 2012: 11:53 AM ET
The move, or lack thereof, puts greater pressure on India's government to get its fiscal house in order.
The central bank aggressively cut its interest rate in April for the first time in three years in an effort to boost growth "based on the premise that the process of fiscal consolidation critical for inflation management would get under way, along with other supply-side initiatives."
Though little has happened, the Reserve Bank said "further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures."
India's economic growth slowed sharply in the first three months of 2012, growing at a 5.3% annual rate compared to 6.1% rate in the final three months of 2011.
Fitch Ratings also chimed in, putting India's outlook on "negative watch" for a possible downgrade.
The rating agency cited heightened risks that India's "growth potential will gradually deteriorate if further structural reforms are not hastened" and India's limited progress on reducing the central government deficit. Fitch affirmed India's credit rating at 'BBB-,' the lowest debt rating that is still considered investment grade.
"Against the backdrop of persistent inflation pressures and weak public finances, there is an even greater onus on effective government policies and reforms that would ensure India can navigate the turbulent global economic and financial environment and underpin confidence in the long-run growth potential of the Indian economy," said Art Woo, Director in Fitch's Asia-Pacific Sovereign Ratings group.
Though India's central bank is standing down, European central bankers signaled last week that they would provide more cash to help banks deal with the ongoing sovereign debt crisis. Even Federal Reserve chairman Ben Bernanke has said that the U.S. central bank is leaving all options on the table, including the extension of Operation Twist, its program to swap short-term bonds for longer-term U.S. Treasuries, as well as a third round of asset purchases, known as QE3.