Indian economy will expand 7.4 per cent in 2018, but the growth will slow down to 7.3 per cent in the next year as domestic demand tapers on higher borrowing cost due to rising interest rates, Moody's Investors Service said Thursday.
In its report titled Global Macro Outlook 2019-20', Moody's said the economy grew 7.9 per cent in the first half (January-June) of 2018, which reflects post demonetisation base effect.
Stating that borrowing costs have already increased on higher interest rates, Moody's said it expects the Reserve Bank will continue to steadily raise the benchmark rate through 2019, which will further dampen domestic demand.
These factors will limit the pace of the Indian economy's growth over the next few years, with real GDP growth of 7.3 per cent in 2019 and 2020, from around 7.4 per cent in 2018, Moody's said.
It said the greatest downside risk to India's growth prospects stem from concerns about its financial sector.
The impact of higher global oil prices compounded by sharp rupee depreciation raises the cost of households' consumption basket, and will weigh on households' capacity for other expenditures. Borrowing costs have already risen because of tightening monetary policy, it said.
Moody's said, in the short term while measures to stabilise the financial sector are put in place, credit growth is likely to slow.
Downside risks from a prolonged liquidity squeeze for non-bank financial institutions, which could lead to a sharper slowdown in their credit provision, remain, it added.
Moody's said global economic growth will slow in 2019 and 2020 to a little under 2.9 per cent from an estimated 3.3 per cent in 2018 and 2017.
The US-based agency expects trade and geopolitical frictions between the US and China to persist for some time.
This will weigh on the global trade growth and will reshape trade flows and supply chains, Moody's added.