Fitch Ratings has lowered India's economic growth forecast for the current fiscal to 6.9 per cent from 7.4 per cent after the GDP growth "unexpectedly faltered" in the April-June quarter.
The credit rating agency said however that it expects the economic activity to accelerate in the second half of the fiscal year with the waning impact of one-off events including the demonetisation shock in late 2016 and the GST rollout in July, which had dampened growth in the short term.
"The large stock of non-performing loans on bank balance sheets could, however, dampen the outlook for credit growth and business investment," Fitch Ratings in its latest Global Economic Outlook (GEO).
The Asian Development Bank (ADB) had last month slashed India's GDP growth forecast for the current fiscal to 7 per cent from 7.4 per cent owing to weakness in private consumption, manufacturing output and business investment.
India had posted a 7.1 per cent growth in in 2016-17.
ADB pencilled in 7.4 per cent for 2018-19, down from the earlier forecast of 7.6 per cent in July.
Fitch Ratings said the global economy has improved markedly this year and is on course to recording its fastest expansion since 2010.
India's GDP growth at 5.7 per cent in the first quarter (April-June), down from 6.1 per cent in the previous year, is "the lowest outturn since early 2013, and GDP has now been cooling for five consecutive quarters", it said.
Economic activity in the quarter, it said, may have been disrupted by firms running down inventory ahead of the implementation of the Goods and Services Tax (GST) in July. The manufacturing sector lost steam in the quarter, growing at a meagre 1.2 per cent year-on-year.
The primary sector also dampened growth, while construction and tertiary activity bounced back. On the expenditure side, net trade was a big drag on growth, with exports decelerating sharply (after an admittedly strong January-March print) and import growth remaining buoyant (at 13.4 per cent yoy).
"In light of the poor 1H17 (first half of 2017) outturns, we have downgraded our forecast for FY17-18 (year-ending March 2018) to 6.9 per cent, a cut of 0.5 percentage points compared to the June GEO," Fitch said.
Forecasting acceleration in activity in the second half of the current fiscal, it said consumption should drive the pick-up in growth.
"Motorcycle sales a good indicator of rural household consumption have gained strong momentum, bouncing back in July and August after having fallen sharply in 1H17.
Investment is also expected to tick up in the quarters ahead, in part bolstered by ramped-up public sector infrastructure spending, Fitch said.
The Reserve Bank of India (RBI) cut its policy rate to 6 per cent in August, resuming the monetary easing cycle initiated in early 2015.
"However, monetary policy loosening has taken place in the context of rapidly falling inflation, implying that the RBI's policy stance as measured by the real policy rate has not been so accommodative," it added.
The global economy has improved markedly this year but the current favourable mix of strong growth and highly- accommodative macro policies could be as good as it gets, it said.
"Our forecasts imply something of a 'sweet spot' for the global economy in 2017 and 2018 with above-trend growth and still highly accommodative global monetary policies. However, this is not a pattern we expect to persist into 2019 and beyond as output gaps close in advanced economies and monetary policy support is withdrawn," said Brian Coulton, Fitch's Chief Economist.
Global growth has been upgraded to 3.1 per cent in 2017 from 2.9 per cent in June, and 2018 growth has been upgraded to 3.2 per cent from 3.1 per cent.