The Reserve Bank of India (RBI) expects the Indian economy to grow below 5 per cent during the current financial year, with a likely increase in GDP growth to 5.5 per cent in the coming financial year beginning 1 April.
India's GDP growth is expected to fall below 5 per cent in 2013-14 in the absence of a pick-up in manufacturing sector, RBI said, adding that it could recover to 5.5 per cent in the next financial year.
''Prospects of a pick-up in real GDP growth in the second half of 2013-14 have been dampened by negative growth in industrial production over two consecutive months,'' RBI said in its report on macroeconomic and monetary developments released along with the third quarter monetary policy review.
Economic growth, it said, could be ''somewhat lower than the central estimate of 5 per cent''.
In the first half of 2013-14, the GDP growth was at 4.6 per cent.
RBI said 2013-14 has been a testing time for monetary policy with an extraordinary spell of financial turbulence arising from the US Fed contemplating tapering its large scale asset purchase programme.
This resulted in a rapid deterioration of financial conditions across emerging markets, including India.
The rupee exchange rate depreciated by 17 per cent against the US dollar, amid a foreign exchange reserve depletion of nearly $17 billion.
The volatile movements for cross-border capital affected asset prices, heralded a turning of the global interest rate cycle.
Like most emerging markets and developing economies (EMDEs), India faced capital outflows and intense exchange rate pressures.
This forced a departure of monetary policy from its charted course of calibrated monetary easing.
While a tight money policy that started in April 2012 helped dampen the pricing power of the corporates within the monetary policy space available, the return to fiscal consolidation in H2 of 2012-13 has reduced the twin deficit risks.
Though macroeconomic weaknesses were evident in the form of persistence in inflation, falling growth, weaker corporate balance sheet, deteriorating asset quality of the banks, fiscal imbalances and external sector vulnerabilities, the economy seemed to be mending. However, the prospect of tapering interrupted this.
RBI said it has been evolving its policy action with rapidly changing financial and macroeconomic conditions.
With some improvement in the foreign exchange market, RBI said it has moved to normalise exceptional liquidity and monetary measures and recalibrate monetary policy, taking into account, the prevailing inflation and growth conditions.