India’s GDP growth is projected to grow from 6.9 per cent in the previous fiscal year to 7.2 per cent in FY 2015, and further to 7.5 per cent in FY 2015-16 as the growth has accelerated, inflation has declined, the current account deficit has narrowed, and external reserves have increased, said a report released by World Bank on Tuesday.

The report points out that India’s government has begun to implement reforms to unlock the country’s investment potential to improve the business environment, liberalise FDI, boost both public and private investment in infrastructure, quickly resolve corporate disputes, simplify taxation, and lower corporate taxes. States are set to receive more resources and spending power.

A tightening of US monetary policy can have a disruptive impact on India’s exchange rate and financial markets. While the Reserve Bank of India has built reserves to reduce India’s external vulnerability, the risk remains, warranting vigilance, said the report. The outlook for new investments continues to be dented by the debt overhang in the corporate balance sheets, which has extended to the Public Sector Banks (PSBs).

The banks’ balance sheets are currently marred by high non-performing loans, low profitability, and subdued credit growth, and may not be able to support higher demand for credit in a robust turn–around of the investment cycle. While some measures have been announced to strengthen the balance sheets of PSBs and to improve their operational efficiency, the report says that more decisive measures will be needed given the magnitude of recapitalisation required.