The Reserve Bank was today optimistic about the economy expanding by 8 percent this fiscal, despite tightening of the monetary policy.

"The Indian economy is firmly on the recovery path... the baseline projection of real GDP growth for 2010-11 is placed at 8 per cent with an upside bias," the apex bank said in its monetary policy statement for FY 11 today.

GDP growth for FY 10 was seen at 7.2-7.5 percent.

The RBI's optimism about an eight per cent growth in FY' 11 is based on the fact that India's exports have been growing and industrial sector recovery has become more broad-based.

"Exports have been expanding since October 2009, a trend that is expected to continue," it said.

Similarly, industrial sector recovery is increasingly becoming broad-based "and is expected to take a firmer hold going forward on the back of rising domestic and external demand," the apex bank said.

The corporate sector has also recorded an improved profitability which is reflective of the improved performance of the industrial sector, it said. .

"Service sector activities have shown buoyancy, especially during the latter half of 2009-10 and leading indicators of various sectors such as tourist arrivals, commercial vehicles production and traffic at major ports show a significant improvement," the Reserve Bank said.

Besides, a sustained increase in bank credit and in the financial resources raised by the commercial sector from non-bank sources also suggest that the economic recovery is gaining momentum, the RBI said.

On downside risks, the apex bank said that uncertainty still persisted about the pace and shape of global recovery and that private demand in major advanced economies continued to be weak.

"There is a risk that once the impact of public spending wanes, the recovery process will be stalled," it said, adding "the prospects of sustaining the recovery hinge strongly on the revival of private consumption and investment."

While domestic demand would drive the Indian recovery, significant trade, financial and sentiment linkages "indicate that a sluggish and uncertain global environment can adversely impact the Indian economy," the RBI said.

Secondly, there is a likelihood of commodity and energy prices hardening further which could add to inflationary pressure, it warned.