With the RBI increasing the repo rate by 50 basis points in its annual policy, CII is concerned that rising interest rates will now begin to have a dampening impact on investment sentiment.

"Industry is already reeling under the impact of rising raw material costs and an increase in interest costs will be an added burden", said Mr. Muthuraman, President, CII.

CII has been recommending that the RBI moderate its interest rate hikes, as it believes such a move would increase the operating costs of companies and make businesses postpone their investment plans.

A decline in investments would be a serious blow to the growth of the economy, CII said adding that with this round of interest rate increases, both the consumption and investment demand will be negatively impacted.

CII had projected that GDP growth for 2011-12 would be in the range of 8.0-8.5%. But now, it said, given the stance taken by the RBI, the bias would be more towards 8.0%.

On the inflation front, CII is concerned that it has been persistently high.

However, given that much of it is being imported through high global oil and other commodity prices, there is requirement within India to address domestic supply side constraints, which are within the action domain of the Government.

CII said it firmly believed that the Government should now focus on supply-side measures to remove the structural impediments to growth.

These would include reforms in the agricultural sector to develop better market linkages, fast-track reforms to free up land for industrial and infrastructure purposes, developing the corporate bond market for availability of long-term funds and opening up more sectors to FDI. CII has recently recommended the identification and fast-track implementation of 100 mega-projects.

"The institution of a project monitoring body which will identify key projects and ensure their implementation within specific timelines will go a long way in keeping up the growth momentum," said Mr. Muthuraman.