The Reserve Bank of India (RBI) must shift its focus back to bringing inflation under control, according to IMF's Mission Chief to India, Laura Papi, who believes the central bank should hold off from monetary policy easing until price pressures ease further.
"We think the best the RBI can do to restore confidence and revive investment is to bring inflation down," Papi told CNBC Asia's "Squawk Box" on Thursday. "While we see that the pressures on wholesale prices have come down, we are still concerned about inflation in consumer prices as it still exceeds 10 percent."
The RBI lowered interest rates by 25 basis points to 7.75 percent in January - its first such move in nine months - to help revive growth in Asia's third largest economy.
India, which is due to report advance estimates for gross domestic product (GDP) growth for the current fiscal year ending March 2013 on Thursday, saw growth slow to 5.3 percent in July to September quarter.
India Cuts Rates for First Time in Nine Months
The IMF forecasts GDP growth in India will ease to 5.4 percent in the 2012-2013 fiscal year, after expanding 6.2 percent in the previous fiscal year.
Papi said that while India has the potential to return to the 8 to 9 percent growth levels seen before the global finical crisis, the government must implement further reforms to bring its fiscal deficit under control.
Indian Finance Minister Makes Case for Ratings Upgrade
"We've seen very encouraging signs on the reform of fuel subsidies, if more is done on that front, this is one of the categories of spending that in our view should be cut - especially in terms of diesel subsidies - and then reallocate that money towards more pro-growth spending such as investment," she said.