The Indian economy that is set to expand at 7.4 percent in 2018, will slow down to 7.3 percent in the next year due to diminishing domestic demand amid higher borrowing costs from rising interest rates, said Moody's Investors Service today.

In its report titled 'Global Macro Outlook 2019-20', Moody's said the economy grew 7.9 percent in the first half (January-June) of 2018, which reflects post demonetisation base effect.

The US-based agency further said that borrowing costs have already increased on higher interest rates, and it expects the Reserve Bank of India will continue to steadily raise the benchmark rate through 2019, which will further dampen domestic demand.

These factors will limit the pace at which the country's economy will grow in the next few years, with real GDP growth of 7.3 percent in 2019 and 2020, lower than the around 7.4 percent in 2018.

The impact of higher global oil prices clubbed with a sharp drop in rupee's valuation has raised the cost of households' consumption basket, and will weigh on households' capacity for other expenditures. Borrowing costs have already risen because of tightening monetary policy, it said.

Moody's said, in the short term while measures to stabilise the financial sector are put in place, credit growth is likely to slow. Risks remain from a prolonged liquidity squeeze for non-bank financial institutions, that could lead to a sharper slowdown in the credit provision, it said.

With inputs from PTI