A slump in investments and foreign demand could mean a slow pace of recovery in 2012-2012, the RBI said
India's central bank said the outlook for the Indian economy has weakened more than expected but inflation remains high, ahead of an interest rate decision.
The Reserve Bank of India (RBI) has raised benchmark rates 13 times since March 2010 to curb consumer prices.
Inflation rose at 7.47% in December, which despite being a two-year low is still well above government targets.
These factors are "complicating policy choices" the bank said.
"Monetary actions will need to strike a balance between risks to growth and inflation," the RBI said.
Growth concern
The RBI has said that domestic growth has been hit by a number of factors.
"Growth in 2011-12 is moderating more than was expected earlier," the bank said.
"The business climate has weakened. The slack in investment and net external demand may keep the pace of recovery slow in 2012-13."
It also warned of spillover from Europe and the slowing global economy.
"With growth decelerating even in emerging and developing economies, the spillovers from euro area are likely to pull down global growth."
And while inflation has been moderating, which could allow monetary policy space to focus on spurring growth, the bank called this a "temporary respite".
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