During 2013-14, amid slow growth and high inflation, the Indian economy had to contend with serious challenges to external stability emanating from an unsustainably high current account deficit (CAD), capital outflows and consequent exchange rate pressures, the Reserve Bank said in its annual report.
Several measures taken by the Reserve Bank and the government helped stabilize the economy.
'With greater political stability, commitment to fiscal consolidation, strengthening of the monetary policy framework and better policy implementation, GDP growth is expected to be around 5.5% in 2014-15 from the sub-5% growth in the preceding two years,' RBI added.
The disinflationary momentum that set in since December 2013 has taken inflation to a lower trajectory, broadly in line with the Reserve Bank's projections. However, downside risks to growth and upside risks to inflation arise from the sub-normal monsoon and the geopolitical situation in the Middle East.
To secure a sustainable growth of at least 7% over the medium term, microeconomic policies that improve activity levels and productivity will be needed so that they can work in tandem with a supportive macroeconomic regime with a reasonably positive real interest rate, low inflation, moderate CAD and low fiscal deficit, it opined.