Fitch has projected India's economic growth to rise to 7.3 per cent next fiscal and further to 7.5 per cent in 2019-20.
In its Global Economic Outlook report, the US-based agency forecast Indian economy to clock a growth rate of 6.5 per cent this fiscal, a tad lower than official estimates by the Central Statistics Office (CSO) of 6.6 per cent. The economy grew 7.1 per cent in 2016-17.
According to Fitch, the pick up in growth is likely as "the influence of one-off policy-related factor which was dragging growth has now waned."
It said the money supply recovered to its pre-demonetisation level in mid-2017 and is now increasing steadily, similar to the previous trend.
Also, disruptions related to the rollout of the goods and services tax (GST) in July 2017 have gradually diminished.
Showing signs of recovery, the Indian economy hit a five-quarter high of 7.2 per cent in the October-December period on a good show in key sectors like agriculture, construction and manufacturing.
Fitch said the Budget for 2018-19 fiscal, beginning April, envisages a slower pace of fiscal consolidation and, therefore, should support the near-term growth outlook.
It contains measures that will benefit low-income earners (such as a minimum price support and free health insurance) and support rural demand. The government also plans to ramp up infrastructure outlays, in particular by state-owned enterprises, the agency said.
"Those policies come on top of substantial road construction plans and a bank recapitalisation plan announced late last year, which should also provide some support to growth in the medium term," Fitch said.
On inflation, Fitch said, accelerating food prices were the main cause of the pick-up in headline inflation. By contrast, fuel price increases have been contained by the government's decision to roll back excise duties to keep pump prices stable in the face of rising oil prices.
"We expect inflation to hover a bit below 5 per cent in 2018 and 2019, in the upper band of the Reserve Bank's target," it said.
Fitch said it expects the Reserve Bank of India to start raising interest rates next year as growth gains further traction, while inflationary pressures should remain quite high.
The minimum support price scheme for agricultural products and increased customs duties on certain products (such as electronics, textiles and auto parts) will boost prices against a backdrop of accelerating growth. —PTI