“Signs of improvement in mining and manufacturing activity, expected pick-up in investments, improved availability of financial resources to the private sector with lower draft of government on financial savings of the households amid fiscal consolidation, improved external demand and stabilising global commodity prices are expected to support the recovery.
“Accordingly, the economy could grow in the range of 5.5 to 6 percent this fiscal,” the RBI said in its annual report for 2013-14.
The central bank, however, warned that the downside risks to growth could play out if global recovery slows, geopolitical tensions intensify or monsoon weakens again in the rest of the season.
The Economic Survey 2013-14 has projected a growth of 5.4 to 5.9 percent in 2014-15.
As of August 13, the all India cumulative rainfall deficiency in the current monsoon season was placed at 18 percent of the long period average (LPA) as against an excess of 12 percent in the year-ago period. The monsoon has improved since mid-July when the deficiency was 43 percent.
The report said even if rainfall is normal in the rest of the monsoon season, some rainfall deficiency will stay.
The RBI said its inflation outlook remains unchanged from the baseline inflation trajectory it had indicated at the beginning of the year, when it committed to disinflationary glide path of taking consumer price index (CPI) inflation to 8 percent by January 2015.
After remaining above 8 percent in April and May, retail inflation moderated to 7.5 percent in June mainly due to favourable base effect.
However, CPI increased to 8 percent in July as prices of vegetables increased substantially on the back of deficient monsoon rainfall.
“Recent increase in inflation driven by vegetable price spike could be temporary as there are early indications that the price corrections are underway,” the RBI said.
The RBI said while inflation trends during the rest of 2014-15 will also be conditional on several risk factors and the timing and extent of further revisions in administered prices, the inflation projection for 2014-15 will remain within reach.
The report said though the balance of risks around the medium-term inflation path and especially the target of 6 percent by January 2016 is still to the upside, the RBI will remain committed to supporting the disinflationary process.
The central bank further said the risks associated with twin deficit risks are expected to stay moderate. It said the fiscal deficit is likely to come down further this fiscal.
“The rebuilding of forex reserves in recent months will help the country buffer the economy against potential shocks,” the central bank said. According to the latest RBI report, the forex kitty swelled to a little over USD 319 billion for the week to August 8.
During this fiscal, the forex reserves swelled by 12 percent to USD 316.14 billion as of June 30, 2014, up from USD 282.45 billion a year ago.
The current account deficit though is likely to widen from the levels in 2013-14, it is expected to remain within the sustainable level, the report said.
“The external sector is far more resilient than before, but risks associated with quicker monetary tightening by advanced economies stay,” the RBI said.