"The wide range of estimates using alternative techniques, on balance, suggests that currently the potential growth may be even somewhat lower than 6 percent," RBI said in its Macroeconomic and Monetary Developments Report released on Tuesday. JPN/Agencies
It said a decline in financial savings, sluggish growth in capital formation over successive quarters, persistently high inflation and low business confidence are the major reasons for the revised estimate. However, it said a modest recovery is likely to take shape in 2014-15.
The document said potential growth, which hovered at 8-8.5 percent levels in the period from the second quarter of 2005-06 to the second quarter of 2008-09, has gone down to 6 percent.
RBI governor Raghuram Rajan's predecessor D Subbarao had once suggested that the potential growth of the economy was 7.3 per cent.
A survey of potential forecasters done by the RBI revised growth for FY15 to 5.5 percent from the earlier estimate of 5.6 percent.
On inflation, one of the key factors that forced the RBI to keep a tight monetary policy, which in turn affected growth, the document said that the disinflationary path is moving as expected but stressed on the need to be vigilant.
Warning of upside risks to inflation in FY15, it said the recent declines in CPI inflation were primarily driven by lower food prices, the benefit of which would wear out with seasonal changes.
CPI inflation, which assumed greater focus under Rajan, eased by over 3 percentage points to 8.1 percent in February, while the RBI is targeting 8 percent by January 2015.
The professional forecasters also lowered their estimate on the average CPI during FY15 to 8 percent from 8.5 percent earlier.
El Nino may have a bearing on inflation: RBI
Further softening of vegetable prices is unlikely and the impact of the El Nino weather phenomenon on the monsoon could have an adverse bearing on inflation, the RBI said.
"Vegetable prices have entered their seasonal trough and further softening is unlikely...There are risks to the central forecast of 8 percent CPI inflation by January 2015 stemming from a less-than-normal monsoon due to possible El Nino effects," the RBI said in its first bi-monthly monetary policy statement for 2014-15, which left interest rates unchanged.
Wholesale price-based inflation eased to a nine-month low of 4.68 percent in February, while retail inflation slowed to a 25-month low of 8.1 percent.
“Excluding food and fuel, however, retail inflation remained sticky at around 8 percent. This suggests that some demand pressures are still at play," it added.
El Nino refers to the warmer-than-average sea surface temperatures in the central and eastern tropical Pacific Ocean. This condition occurs every four to 12 years and had last hit India's monsoon in 2009, leading to the worst drought in almost four decades.
Other risks to inflation are uncertainty on minimum support prices for agricultural commodities and other administered prices, especially of fuel, fertiliser and electricity, the outlook for fiscal policy, geo-political developments and their impact on global commodity prices.
RBI Governor Raghuram Rajan said there is still uncertainty over the actual impact of El Nino on the June-September monsoon and agriculture output.
"It's not a given that El Nino will happen and it's not a given that food production plummets. If food production plummets, it is not a given that inflation across the board will be high...I don't think at this point we can anticipate precisely what will happen," Rajan said.
"The wide range of estimates using alternative techniques, on balance, suggests that currently the potential growth may be even somewhat lower than 6 percent," RBI said in its Macroeconomic and Monetary Developments Report released on Tuesday.