The Bank, however, expects that Indian economy will recover in fiscal 2019 and achieve a growth rate of 7.2 per cent.
The Indian government will play a balancing act between reviving growth whilst maintaining its macro-stability credentials in fiscal 2019.
The recent rating upgrade from Moody's was a big boost to sentiment and is likely to lower offshore borrowing costs for Indian companies, it said in a country report "India in 2018/19".
"With businesses still adjusting to the goods-and- services tax (GST) regime, slow progress in corporate deleveraging, and limited room for fiscal support, we have nudged down our FY18 GDP forecast to 6.6 per cent YoY from 6.8 per cent previously," it said.
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These will test the economy's resilience against any unexpected event shocks, at a time when global tailwinds (oil and liquidity) look set to reverse, said the bank.
The Goods and Services Tax (GST) tweaks will help lower the tax incidence on consumers. Lead indicators, including auto sales and personal credit growth (for urban spending), as well as non-durables output (rural demand) are expected to improve, the bank observed.
It noted that cyclical forces (twin balance-sheet stress and weak trade) and structural changes (expedited formalisation) have hurt India's growth in the past few years.
However, incoming data has been pointing to some stabilisation in Q2 FY18 on restocking demand and better consumption before losing momentum again into Q3, according to the bank.
The Indian Rupee (INR) will no longer be resilient to US interest rate hikes in the coming two years compared to 2016- 17.
"We expect the INR to depreciate towards 67 and 68 against the USD in 2018 and 2019, respectively," the DBS report said.
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