India on its way back to 7% growth, 6% inflation: Citigroup

The Indian economy stands at the cusp of a recovery and is on its way to a 7% growth rate and 6% inflation, says a Citigroup research report.

According to the global financial services major, there is a strong new political will coupled with a credible and active central bank and "this mix is steadily changing India's dynamics".

"While there can be plenty of debate on pace and timing, India is on its way back to 7% growth and 6% inflation," the Citigroup research report said.

The country's GDP growth had bottomed out at 4.5% in FY13. But recovery began to take shape in the latter half of FY14 and the pace appears to have improved this fiscal.

The report noted that recent initiatives on the clearance process, particularly in the case of environment and forest regulations, could speed up project implementation.

Moreover, "opening of FDI in defense/railways, higher allocation on infrastructure, cutting red-tape, expanding the role of the PMG all point to FY17 GDP growth reviving back to 7%, if not more," Citigroup said.

Meanwhile, inflation level has come off from around 10% levels in FY13 and FY14. Inflation is estimated to be around 8% in FY15 and is likely to decline further towards 6.5% in FY16, Citigroup said.

In addition, the current account deficit has declined from levels of over 4% of GDP in FY12 and FY13, to 1.7% of GDP in FY14 and is likely to remain at sub-2% levels in FY15 / FY16.

"India is well on the path toward macro-stabilisation, with deficits being contained and the growth-inflation imbalance being corrected. Nonetheless, there is no room for complacency," the report said.

Citigroup said there is still a long way to go for the economy as growth remains below potential, inflation is above comfort levels, there is risk on capital flows and exchange rate volatility; and lastly global rating firm S&P continues to maintain negative watch on India credit ratings.

"Nonetheless, while the challenges remain formidable, the regime change in Delhi and Mumbai inspire confidence. We look at the vision and mechanism through which Prime Minister Modi and RBI governor Rajan could put India back on track of high growth, low inflation and sustainable deficits," the report said.