The government and the Reserve Bank of India (RBI) are perhaps facing their biggest macroeconomic dilemma in the last seven years. A slew of monetary and fiscal policies aimed at curing inflation have not tamed prices but adversely affected growth in the broader economy.
India's gross domestic product (GDP) grew by 7.7% during April-June, the slowest in six quarters, as high interest rates and rising input costs forced firms to halt capacity expansion plans.
Corporate investment is moderating as capital expenditure is led by profit cycle, which appears to have been affected by escalation in input costs.
Investments in new projects at Rs 2,66,453 crore was the lowest in seven quarters during January-March - the latest for which data was available.
India's inflation rate in July rose to 9.22% driven by high prices of fuel and manufactured products.
The RBI, which will present its mid-quarter monetary policy review in September, has raised the repo rate by 11 times in the past 16 months to cool prices.
A higher repo raises banks' borrowing costs, prompting them to hike lending rates for final home, auto and corporate loans.
The biggest impact have been played out in the construction sector, which grew by a modest 1.2% year-on-year during the quarter compared to 7.7% last year.
"The latest GDP data are supportive of another rate hike by the RBI on September 16," said Rajeev Malik, senior economist, CLSA, Singapore, a broking and research firm.