RBI's comment came in the backdrop of a sharp drop in the economic growth, especially in industrial production.
India's economic growth slumped to a nine-year low of 5.3 percent in the quarter ended March 31. Growth in gross domestic product fell to 6.5 percent in 2011-12, as compared to 8.4 percent in the previous year.
Despite growing pressure from the industry for rate cuts, the RBI in its mid-quarter monetary policy review, announced on June 18, kept key policy rates unchanged.
Addressing the 104th Annual General Meeting of the Indian Merchants' Chamber, Subbarao pointed out that the rate of gross fixed capital formation has declined to less than half of the more than 15 percent growth registered during the pre-global economic crisis period of 2008-09.
He said that large fiscal deficit, growing supply-side constraints, persistent inflation, and adverse external environment dampening domestic sentiments were also putting pressure on the potential of economic growth.
Subbarao said that the government must cut spending to bring more fiscal discipline.