Indian economy will expand by 7.4 percent this year, but growth will slow down to 7.3 percent next year as domestic demand shrinks on higher borrowing cost due to rising interest rates, according to Moody's Investors Service. The economy grew by 7.9 per cent in 2018 first half, reflecting post-demonetisation base effect, Moody’s said in a new report.

As borrowing costs have already increased on higher interest rates, Moody's expects the Reserve Bank of India to continue to steadily raise the benchmark rate through 2019, which will further dampen domestic demand.

These factors will limit the pace of the Indian economy's growth over the next few years, Moody's said in its ‘Global Macro Outlook 2019-20'.

The biggest downside risk to India's growth prospects is from concerns about its financial sector, a news agency reported citing the document.

Higher global oil prices compounded by sharp rupee depreciation raises the cost of households' consumption basket and will weigh on their capacity for other expenditures. Borrowing costs have already increased because of tightening monetary policy, it said.

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 added.