from the depreciation of the rupee – could impact the speed of economic recovery," said Denis Medvedev, senior country economist for the World Bank, India.
While market sentiment has improved in the past few weeks, challenges remain, highlighting the importance of prudent macroeconomic policies and continued reforms to set strong foundations for accelerated growth, he said.
The current situation offers an opportunity to strengthen the business environment and enhance fiscal space even as the reform momentum has accelerated in the past few months, Rama added. Activity is expected to pick up strongly in the last six months of the fiscal year, rising above 6 per cent in the fourth quarter of the current fiscal, the World Bank said.
This will come as financial markets stabilise, exporters take advantage of improvements in external competitiveness following the depreciation in the rupee, the manufacturing sector recovery continues and delayed investment projects begin to come on stream.
Pressure on inflation is likely to moderate, the World Bank said. The bank cut its projection for wholesale price index (WPI) inflation to 5.3 per cent for the current financial year against its earlier forecast of 6.7 per cent.
The downward momentum in core WPI inflation, observed throughout calendar 2013, is expected to continue in 2013-14, it said.
Six consecutive quarters of sub-6 per cent growth have allowed for an opening of the output gap, which is likely to limit inflationary pressures even with the expected acceleration in economic activity during the forecast period, the bank said.
Fuel prices, on the other hand, will continue to add to the inflationary momentum as international oil prices are likely to remain elevated throughout the forecast period.
"Altogether, WPI inflation is expected to average 5.3 percent in the current fiscal year and decelerate further to 5.2 percent in 2014-15 as pressure from food prices declines due to an improvement in agricultural output," it said.
On the current account deficit (CAD), the report said, it is expected to narrow to 4.1 per cent of GDP in the current fiscal against an earlier projection of 4.5 per cent.
"The first quarter of FY2014 witnessed a widening of the trade deficit as the