This move is said to directly aimed at the Amazon Kindle Fire and hopes to offer the 8GB tablet at a competitive price.
While the iPad still dominates tablet sales, The Kindle Fire has attracted quite a few customers with it's attractive price tag.
The expected Retina display on the iPad 3 will only ensure the new iPad maintains it's premium price tag, Apple needs to think about the customers who are looking for a cheaper product, allowing companies to dominate the 7 inch tablet market would eventually see Apple's dominant position as the tablet market leader threatened.
However there is still the rumored 7 inch iPad which may also make an appearance. If the rumors of the 8GB iPad 2 are true, I would probably expect to see it in the form of a 7 inch tablet.
source - DigiTimes