S&P Global Ratings on Tuesday raised India's growth forecast for the next financial year to 6.8%, but flagged restrictive interest rates as a dampener for economic growth.
The Indian economy is estimated to have clocked a growth of 7.6% in the current fiscal.
In November, last year, the U.S.-based agency had projected India's growth to be 6.4% in 2024-25 fiscal on robust domestic momentum.
"For Asian emerging market economies, we generally project robust growth, with India, Indonesia, the Philippines, and Vietnam in the lead," S&P said in its Economic Outlook for the Asia Pacific.
In largely domestic demand-led economies such as India, Japan, and Australia, the impact of higher interest rates and inflation on household spending power reduced sequential GDP growth in the second half, S&P said.
"We expect India's real GDP growth to moderate to 6.8% in fiscal year 2025 (ending March 2025)," S&P said.
Restrictive interest rates are likely to weigh on demand next fiscal year, while regulatory actions to tame unsecured lending will affect credit growth. A lower fiscal deficit will also dampen growth, it added.
"Even as we expect a mild slowdown in Asian EM economies, we generally see solid domestic demand growth and a pick-up in exports to drive robust growth, with India, Indonesia, the Philippines and Vietnam in the lead," S&P said.
It said high real policy rates will choke demand and are therefore likely to strengthen the case for lowering rates.
S&P said it forecast rate cuts of up to 75 basis points in India this fiscal. "In line with our projection for US policy rates, we largely expect these moves to occur in the second half of the year," it said.
In India, slowing inflation, a smaller fiscal deficit and lower U.S. policy rates will lay the ground for the Reserve Bank of India to start cutting rates. But we believe more clarity on the path of disinflation could push this decision at least to June 2024, if not later, S&P added.
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