’ s recent macroeconomic performance. first, the investment climate has improved and industrial and service sector activity has picked up. second, buoyant exports have emerged as the driver of demand for a broad spectrum of industries. third, there has been a modest attempt at and a commitment to achieve fiscal consolidation. fourth, the trend inflation has declined over the years and inflation expectations stabilised. fifth, india has been successful in managing liquidity against the backdrop of continuing capital flows. sixth, india has emerged as a preferred destination for foreign investors and received about a quarter of the global portfolio flows to the emes in 2004. seventh, india ’ s foreign exchange reserves are in excess of the total outstanding external debt of the country. eighth, the performance of the corporate sector has improved and some corporates are now listed on the international stock exchanges. ninth, india ’ s financial markets have deepened, widened and become vibrant over the years with a robust institutional framework and market infrastructure in place. tenth, the profitability and soundness indicators of the banking sector have improved. finally, india has been adopting international benchmarks for financial standards and best practices with suitable adaptations for indian conditions. the indian economy today is characterised by an environment of confidence, positive business expectations, a renewal of rule - based fiscal consolidation, stable and orderly financial markets and institutions and progressive integration with the global economy. real gdp growth for 2005 - 06 ( april - march ) has been conservatively projected at around 7. 0 per cent, and more recently, revised upwards to a range of 7. 0 to 7. 5 per cent. despite the sustained strength of export performance, the merchandise trade deficit is expected to be somewhat higher in 2005 - 06 than in the previous year, mainly on account of substantially higher oil prices and non - oil import demand for investment. for the year as a whole, while invisibles may finance a large part of the enlarged trade deficit, the current account deficit is expected to widen during 2005 - 06 but to remain within acceptable limits that can be financed by normal capital flows. the headline inflation is expected to lie in the range of 5. 0 - 5. 5 per cent. consolidation of central government finances is the goal of fiscal policy at the centre – the targets are : the gross fiscal deficit ( gfd ) of 3. 0 per cent of gdp and the elimination of the revenue deficit by 2008 - 09. the fiscal position of state governments also continues to undergo slight correction in terms of key deficit indicators.

by regulatory actions. apart from having built up a significant capital base reflected in the capital to risk - weighted assets ratio ( crar ) for the sector of 12 %, specific steps have been taken to meet the interest rate risk. first, separate provision for capital against market risk has been introduced. second, a gradual building up of investment fluctuation reserve up to 5 % of the markedto - market portfolio ( out of tax - free profits ) by march 2006 has been mandated, and several banks have already achieved the target. third, an enabling risk management environment has been provided to banks to hedge their risks through vanilla derivative instruments. fourth, conservative accounting norms followed did not allow banks to book unrealized gains. fifth, as a one time measure, banks were allowed to transfer securities to htm, after booking the mtm losses against these. thus, banks in india, in general, have the resilience to withstand some rise in interest rates. impact on the real sector readjustment of the currencies would also have implications for the real sector. significant readjustment of the currencies and rise in interest rates could slow down the global growth. this would entail a reduction in export opportunities and reduction in investment demand for emes, in general, many of which depend on export demand to sustain their growth. rise in interest rates, by slowing down spending, may have a negative impact on the global economic growth. thus, readjustment of the currencies may affect several emes in a significant way. the impact of any slowdown on india may be assessed with reference to two factors. first, india's economy is largely domestic - demand driven. while india ’ s exports constituted 11. 5 per cent of gdp, its share in the world trade is only 0. 8 per cent. second, india's exports basket is fairly diversified. some concerns arise with regard to the implications for employment in case of a slowdown in the exports sector, especially with regard to the significant specialisation in bpo / it enable services. rapid job growth that absorbs the huge supply of agricultural labour into its industrial work force is necessary for socio - economic stability in india. any negative impact on employment resulting in substantial decrease of real earnings and widening income inequality is likely to reduce overall welfare and increase the cost of structural adjustments required, especially in the absence of meaningful social safety nets. monetary and prudential measures as responses the outlook for output growth in india has