India's economy grew at a slower 5.3% during July to September, from the previous quarter's 5.7%, intensifying pressure on the RBI to cut interest rates and reinforcing the need for speedier reforms to arrest the slide.
The manufacturing sector, which accounts for about 15% of India's gross domestic product (GDP), rose 0.1% during the quarter from the previous period's 3.5%.
Boosting output in the millions of factories lies at the core of the Narendra Modi-led government's plans to turnaround Asia's third largest economy that has grown at sub-5% in the last two years.
Business leaders have racheted up their demand for an interest rate cut, arguing that costly borrowing is holding back investment.
Stocks cantered to new highs with the 30-share BSE Sensex galloping 255.08 points to 28,693.99 and Nifty surging 94.05 points to 8,588.25 on heightened expectations that tumbling oil prices will cool inflation further and prompt the RBI to cut lending rates on December 2.
The government wants to boost the share of manufacturing in country's gross domestic product to 25% from about 15% now, roughly the same share of the economy as peers like Brazil and Russia but less than China's 32%.
Over the last six months the government has laid out the red-carpet for foreign investors with a string of initiatives such as `Make in India' initiative aimed at turning India into a manufacturing powerhouse and iron out procedural and bureaucratic irritants that are often cited as holding back investments.
Analysts said the pace of India's recovery will largely be determined by the rapidity at which the government is able to push through key reforms including contentious ones such as the raising the FDI cap in the insurance sector to 49% fro 26%, easing land buying rules for industry and modernising India's labour laws.
For 64-year-old Modi at stake is a key election promise to lift the lowest living standards among emerging markets by creating jobs for about 100 million young Indians who will enter the workforce over the next decade or so.
"With low energy prices, the currency stable and core inflation falling, interest rates are likely to come down. This favourable climate is creating more room to introduce "big-bang reforms"," leading industrialist said requesting not to be identified.
Petrol and diesel are likely to turn even cheaper in India as global oil prices slumped to four-year lows to around $70 a barrel on Thursday after OPEC-a group of major oil supplying countries-decided against cutting back production.
India's retail inflation fell to a three-year low of 5.52% in October, while wholesale inflation rate plunged to five year low of 1.77%, aided by a sharp drop in vegetable and petrol prices.
Lower inflation, in turn, could prompt RBI to cut interest rates and nudge banks to lower lower home loan EMIs.