The Reserve Bank on Tuesday said growth is expected to fall below 5 per cent in 2013-14 in absence of pick-up in manufacturing sector, but likely to 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," the RBI said in the Macroeconomic and Monetary Developments report released along with the third quarter monetary policy review.
The 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.
For fiscal 2014-15, there is a case for gradual recovery to the 5-6 per cent band, the RBI said, giving a central estimate of 5.5 per cent growth.
The central bank further said if the nearly 130 projects worth over Rs 4 lakh crore cleared by the Cabinet Committee on Investments translate into investments, global growth improves and inflation softens, the country's GDP growth could come in at "the higher reaches" of the forecast range of 5-6 per cent.
On the inflation front, the report said retail inflation, which stood at 9.52 per cent for December, is likely to soften further in the January-March quarter on seasonal softening in fruit and vegetable prices.
For the fourth quarter, the headline CPI inflation is expected to range between 7.5 and 8.5 per cent with an upside risk, it added.
A survey of professional forecasters, polled by the central bank, said there will be a modest recovery in growth in FY15, even though inflation pressures are likely to persist.
The professional forecasters' median expectations for FY14 GDP growth were at 4.8 per cent, while in FY15, they expect it to pick up to 5.6 per cent. On inflation, the forecasters estimate the CPI inflation to come in at 8.5 per cent.
On the exchange rate, they expect the rupee to be at the 61 levels by December 2014. Between May and September, the RBI said the rupee had lost 17 per cent but from September to January 27, the local unit gained 6.7 per cent.
Referring to the external sector, the report said the current account deficit, which touched an all time high of 4.8 per cent at $88 billion in FY13, will ease to 2.5 per cent this fiscal.
The RBI report also flagged concerns from the upcoming elections, saying though "normalcy (has been) restored (recently) in the financial markets, political outcomes and commitment to reforms hold the key" for the future stability of the market and the rupee.