However, the pace of economic recovery will be slow in view of macro stability challenges such as high inflation, current account deficit and loan-deposit ratio, Morgan Stanley said adding it has kept its GDP projections for FY14 unchanged at 6.2 per cent in line with this view.
"We raise our GDP growth forecast for F2013 to 5.4 per cent from 5.1 per cent based on the better than expected GDP growth for quarter ended September and also stabilisation in non-agriculture growth indicators," Morgan Stanley said in a research note.
According to the global financial services firm, the headline GDP growth of India will be at 5.4 per cent in FY2013 (up from 5.1 per cent projected earlier) and 6.2 per cent (unchanged) in F2014.
The Indian economy registered a GDP growth of 5.3 per cent for the quarter ended September. The economy grew by 5.5 per cent growth in the June quarter and 6.7 per cent in the quarter ended September 30, 2011.
"We believe that headline GDP growth will begin to show a gradual recovery trend in the quarter ending March 2013: We look for farm output to normalise and non-agriculture output to continue to improve, albeit slowly," the report said.
The key factors that could bring upside or downside risks to these growth estimates are policy reforms supporting investment outlook; government's effort on fiscal deficit management and rural wage growth.
Some other factors that could affect these projections include external demand; trend in capital flows; and global crude oil prices.
Over the past two months, co-incident indicators of consumption - such as auto sales and consumer non-durables production - have shown signs of stabilisation and India's exports have improved on a seasonally adjusted month-on-month (MoM) basis.
However, the persistent weakness in the investment cycle has been the most important factor keeping growth at low levels in the current cycle, Morgan Stanley said.
On the policy front, the report said the RBI may start the easing cycle in the first quarter of 2013 and policy easing could be limited to about 75 bps in 2013.
"We believe that even as inflation starts to ease from 1Q2013, it may remain above the RBI's comfort zone for longer.
Hence, we expect policy easing to be limited to about 75bps in 2013," the report said.