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Indian economy will expand at 7.4 percent in 2018, but the growth will slow down to 7.3 percent in the next year as domestic demand tapers on higher borrowing costs due to rising interest rates, Moody's Investors Service said today.
In its report titled ‘Global Macro Outlook 2019-20’, Moody's said the economy grew 7.9 percent 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, the U.S.-based agency said it expects the Reserve Bank of India will continue to steadily raise the benchmark rate through 2019, which will further dampen domestic demand.
These factors will limit the pace of the economy's growth over the next few years, with real GDP growth of 7.3 percent in 2019 and 2020, from around 7.4 percent 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 said.
Moody's said global economic growth will slow in 2019 and 2020 to a little under 2.9 percent from an estimated 3.3 percent in 2018 and 2017.
It expects trade and geopolitical frictions between the U.S. and China to persist for some time.
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