The Indian economy is expected to witness cyclical growth recovery, with real GDP growth likely to accelerate from 6.4 per cent this year to 7.5 per cent in 2018 and further to 7.7 per cent in 2019, says a report.

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According to global financial services major Morgan Stanley, corporate return expectations and balance sheet fundamentals are improving, and a strengthening financial system should be able to meet investment credit demand.

"This sets the stage for a fully fledged recovery in 2018, and we expect real GDP growth to accelerate from 6.4 per cent in 2017 to 7.5 per cent in 2018 and further to 7.7 per cent in 2019," Morgan Stanley said in a research note.

The global brokerage is confident about prospects for a recovery in private capital spending as demand conditions are improving post demonetisation and GST implementation.

Besides, both consumption and exports are picking up and this in turn should lead to an improvement in corporate revenues.

"...Plan to recapitalise the state-owned banks would remove the potential tail risk of the banking system posing a drag on growth, improve the headroom for growth and boost investors' and domestic corporate sentiment," Morgan Stanley said, adding "this should help to cement the growth acceleration and capex recovery that we were expecting".

On prices, the report said the cyclical growth recovery and normalising food prices should drive a pick-up in headline inflation.

"Against the backdrop of better macro outlook, we expect the RBI to hike in the second half of fiscal 2019," it noted.

The Reserve Bank of India in its fifth bi-monthly review for the current fiscal on December 6, kept repo rate unchanged at 6 per cent and reverse repo at 5.75 per cent.