Fitch Ratings Friday upped India's growth forecast for the current fiscal to 7.8 per cent, from 7.4 per cent earlier, but flagged rising oil bill and higher interest rates as key concerns.
Fitch, in its Global Economic Outlook, said it expects inflation to rise to the upper end of the central bank's target band (4 per cent, plus-minus 2 per cent) on relatively high demand-pull pressures and rupee depreciation.
"We have revised up our forecast for FY2018-2019 growth to 7.8 per cent from 7.4 per cent on the back of the better-than-expected 2Q18 outturn. India's growth likely peaked in 2Q18 (April-June) though," Fitch said.
Growth forecast for 2019-20 and 2020-21 fiscals, however, have been cut by 0.2 percentage points to 7.3 per cent.
"The economic outlook is subject to several headwinds, including tightening of financial conditions, a rising oil bill and weak bank balance sheets," it added.
Fitch said the Indian rupee (INR) has been the worst-performing major Asian currency so far this year.
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"And despite the central bank's greater tolerance for currency depreciation, interest rates have been raised by more than anticipated, the global rating agency said in the report.
The upward revision in growth forecast for current fiscal comes in the backdrop of GDP expanding 8.2 per cent in April-June quarter, higher than Fitch's expectation of 7.7 per cent.
This robust performance was partly attributable to a powerful base effect, with GDP growth dampened in April-June quarter of 2017 by companies de-stocking ahead of the rollout of the goods and services tax, Fitch said.
"Fiscal policy should remain quite supportive of growth in the run-up to elections likely to be held in early 2019. The investment/GDP ratio has stopped trending down, helped by ramped-up public infrastructure outlays, in particular by state-owned enterprises (SOEs), the agency said.
On global growth, Fitch said the US-China 'trade battle' led to increased "downside risk".
Fitch cut China's growth projection for 2019 by 0.2 percentage points to 6.1 per cent. Global growth is estimated at 3.3 per cent for 2018 and 3.1 per cent for 2019.
"The trade war is now a reality," said Fitch Chief Economist Brian Coulton.
"The recently announced imposition of US tariffs on a further USD 200 billion of imports from China will have a material impact on global growth and, even though we have now included the 25 per cent tariff shock in our GEO baseline, the downside risks to our global growth forecasts have also increased," Coulton added.