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Terming inflation as the biggest challenge before the Indian economy, Moody`s said the Reserve Bank should focus on controlling the price rise and added that maintaining the balance between growth and inflation would a test for policymakers.
"The slowdown in India`s real GDP in the three months to March was not entirely unexpected... The economy is still carrying strong growth momentum into 2011 and should grow in a range of 8.5-9.5% over the next few years, in line with its recent trend," it said in a report.
The country`s economy grew by 7.8% during the quarter ended March, the slowest pace of growth in the last five quarters mainly on account of poor performance of the manufacturing sector.
It had registered a growth of 9.4% in the corresponding quarter of the previous fiscal and by 8.3% in the third quarter of 2010-11.
Overall, the economic growth during 2010-11 was 8.5%, a tad below the government`s forecast of 8.6%, but well above 8% registered in 2009-10.
In the pre-Budget survey, the government had projected economic growth during 2011-12 at 9%. However, in its monetary policy released last month, RBI said the economy is likely to register a growth of only around 8% this financial year.
Calling upon the RBI to be proactive in controlling inflation, which it termed as the biggest threat to India`s growth, Moody`s, however, cautioned that policymakers would face a tough task in balancing between growth and price rise.
"As for controlling inflation, the central bank`s job is far from done...Interest rates will have to rise further to tame inflation and that will come at expense of investment. Policymakers` greatest challenge will be managing the balancing act between inflation and growth," Moody`s said.
RBI has already hiked its key-policy rates nine times since March 2010 to curb demand and tame inflation.
Experts had blamed high inflation and the resultant rate hikes as the reason for slowdown in the manufacturing sector. Rising interest rates and input costs of commodities have led to a slowdown of investments in the sector.
Headline inflation has been above 8% since January 2010 and stood at 8.66% in April this year.
Moody`s said that global commodity prices, particularly or crude (which are currently above $100 per barrel) remain the primary obstacle in the path of economic growth.
