The Reserve Bank expects India's economic growth rate to accelerate to 7.4 per cent in the current financial year on pick up in industrial activity and good monsoon.
In its annual report released today, RBI also said that its monetary policy will continue to be guided by the objective of achieving the medium-term target for retail inflation of 4 per cent, within a tolerance band of +/- 2 per cent, while supporting growth.
It cautioned that India's external sector will have to confront global headwinds, but expressed confidence that the Current Account Deficit would largely be financed by foreign direct investment.
Several experts, including largest lender State Bank of India, expects the CAD to widen this fiscal on account of persistent high oil prices and large trade deficit. The CAD was estimated at 2 per cent of the GDP in fiscal year ending March 2018.
The report notes that agricultural production is likely to remain strong, growth impulses in industry are strengthening (propelled by a sustained pick-up in manufacturing and mining activity), corporate are reporting robust sales growth and improvement in profitability, and services sector activity is also set to gather pace.
Also, revenue-earning freight traffic of railways has picked up, driven by stepped-up movement in coal, fertiliser and cement.
"Over the rest of 2018-19, the acceleration of growth that commenced in 2017-18:H2 is expected to be consolidated and built upon.
"Keeping in view the evolving economic conditions, real GDP growth for 2018-19 is expected to increase to 7.4 per cent from 6.7 per cent in the previous year, with risks evenly balanced," said the RBI's Annual Report.
The report has maintained the projection regarding GDP growth for the current fiscal as estimated in the third bi-monthly monetary policy of 2018-19 announced earlier this month.
Going forward, it said the up-tick in credit growth is likely to be supported by the progress being made under the aegis of the Insolvency and Bankruptcy Code (IBC) in addressing stress on balance sheets of both corporates and banks, recapitalisation of state-owned banks, and a positive outlook on the economy.
"The prevailing negative credit-to-GDP gap indicates that there is sufficient scope for credit absorption and expansion in bank lending on a sustained basis," the report said.
On inflation which averaged 4.8 per cent during Q1:2018-19, is likely to face upside risks over the rest of the year from a number of sources, warranting continuous vigil and a readiness to head off those pressures from getting generalised, it said.
Rising global commodity prices, especially of crude oil, and recent global financial market developments are firming up input cost pressures.
The RBI has cautioned that global headwinds are likely to confront India's external sector in 2018-19.
Even though exports have gathered momentum in April-June quarter of 2018-19, the worsening global trade environment as a result of "protectionist policies" may impinge upon external demand, it said.
Elevated crude oil prices and the strengthening of domestic demand may push up the import bill.
As per the report, over the medium-term, the pace and quality of growth will be anchored by progress on the unfinished agenda of structural reforms in -- resolution of banking and corporate financial stress; taxation; agriculture; liberalisation of the economy's external interface, especially with FDI; and galvanising the business environment.
"The hard-earned gains of macroeconomic stability that have defined the recent period as its greatest achievement need to be preserved as an imperative within this endeavour," it said.
The Central Statistics Office will release the GDP estimate for the April-June quarter (Q1 of 2018-19) on August 31.