Delivering a lecture on "Economic growth and external sector" at the Euromoney conference here on Thursday, Rangarajan said that economy was poised to achieve a growth rate of 6 per cent during the current fiscal and added that "Indian economy possesses the capacity and the resources to grow by 7 per cent in a sustained way."

The former RBI chief also stressed that the fundamentals of the economy in general and more particularly in relation to external sector continue to remain strong. Referring to the current year, he said, a growth rate of close to 6 per cent should be expected with a pick up in agricultural growth rate, which should be possible with the projected normal rainfall, an industrial growth rate of 6 per cent and the services sector growing between 8 and 9 per cent as it has been doing in thepast several years.

He hoped that the growth could still be higher if industrial production responded to the various stimuli including improved agricultural performance.He told the investors that the "their actions relating to both direct investment and portfolio investment must be determined by these fundamental factors, particularly when the level of reserves, the ratio of external debt to GDP and the external debt service ratios remain at internationally accepted levels."

Talking about the medium term prospects, he said, with a domestic saving rate ranging between 25 and 26 per cent and even with a modest current account deficit of 2 per cent of GDP, the growth rate of 7 per cent was possible with Icor remaining more or less at 4. He further said that with an improvement in the saving rate and better efficiency in the use of capital, it might be possible to improve on this growth rate.

As far as external sector was concerned, Rangarajan recalled that the current account deficit in 1995-96 was 1.8 percent of the GDP. Later in 1996-97, it was 1 per cent and in 1997-98 the current account deficit worked out to be 1.5 per cent of the GDP. More importantly, during this period the foreign exchange reserves continued to rise.

Even in 1997-98, he said, there was an addition to the foreign exchange reserves by $ 3 billion and as on March 1998, the foreign currency assets stood at $ 25.9 billion with minimal forward obligation. Rangarajan explained that short-term debt as a percentage total external debt was 5.5 per cent in 1995-96, 7.2 per cent in 1996-97 and estimated to be 6.3 per cent in 1997-98. Also short-term external debt as a percentage of foreign exchange reserves was 23.3 per cent in 1995-96, 25.5 per cent in 1996-97 and 19.8 per cent as on September 1997.