Liquidity constraints faced by some non-bank financial institutions (NBFIs) will tighten credit supply and slow growth to a little over 7 percent for the current fiscal, Moody's Investors Service said.
"The liquidity constraints faced by some NBFIs in India, after the default of Infrastructure Leasing & Financial Services Ltd (IL&FS) in September 2018, will likely tighten overall credit supply in the country," Moody's said in a statement.
Besides, any further distress in the NBFI sector will pose significant downside risks to India's growth outlook, it said.
Moody's Managing Director and Chief Credit Officer (Asia Pacific) Michael Taylor said India's GDP growth will slow to just above 7 percent for fiscal 2019 and 2020.
Indian economy grew at 7.1 percent in the July-September quarter, lower than 8.2 percent in April-June.
The rating agency said NBFIs are an important provider of credit to the economy and, in the fiscal ended March 31, 2018, accounted for nearly 17 percent of total loans and one third of total retail loans.
"In a downside scenario, a sharper slowdown in NBFI credit supply would significantly tighten overall credit availability, drive up borrowing costs and reduce economic growth by around half a percentage point over a few years," Moody's VP and Senior Analyst Joy Rankothge said.
Weaker nominal GDP growth over a prolonged period would weigh on India's fiscal strength and the overall sovereign credit profile, Rankothge added.
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