Noting that external sector vulnerability indicators have worsened, the central bank said that short-term debt has to be brought down.
Even as monetary policy must be calibrated to address CAD, it should be such that growth is not compromised, the report said.
On economic growth, RBI said the recovery can take shape later in 2013-14 but added it hinges on better governance and removal of supply constraints and maintenance of stability.
The central bank also said rural consumption demand could provide some buffer to growth on the back of normal monsoon. The normal rains could also dampen food inflation, RBI said.
However, the sharp fall of the exchange rate along with persistent food inflation could drive up headline inflation in 2013-14. RBI called for a speedy clearance of the infrastructure projects.
The central bank pointed out that of 569 projects, around 277 have been delayed and the resultant cost overruns were 18.8%.
“If infrastructure sector issues are not quickly resolved, it can have a domino effect on the asset quality of banks,” the report warned. RBI noted that banks’ non-performing assets have surged in 2012-13 to 3.42% of total loans.