Many parts of India have been hit by drought

With many parts of India seeing insufficient rainfall this year, and the country importing much of its oil needs, the bank said GDP may fall.

The Reserve Bank of India (RBI) also warned that India's currently low interest rates may rise.

Yet the bank said the Indian economy overall remained in "bright shape".

"While prospects for GDP growth continue to be bright, in particular, due to a possible acceleration in growth of world output and enhanced domestic investment activity, there are also downside risks," the central bank said in its annual report for 2003/04, released on Monday.

Contrasting weather

In its annual policy statement delivered in May, the central bank forecast that the Indian economy would grow by 6.5% to 7% in the year to March 2005.

This forecast was based on the assumption that the monsoon would be normal and there would be an upturn in industrial activity and exports.

Yet with less than expected rain in northern, western and central India affecting crop production, many analysts have now downgraded this GDP growth prediction to 6%.

About 600 million Indians are dependant upon the land, and thus directly affected by adverse weather.

The mass droughts come at the same time as two northern states - Bihar and Assam - continue to recover from their worst floods in 10 years.