Indian economy is likely to grow by 6.5 per cent in 2013 driven by favourable external demand outlook and domestic structural reforms push, a Goldman Sachs report said on Thursday.

According to a research note by the investment banking major, growth is likely to pick up gradually to 6.5 per cent in 2013 and further to 7.2 per cent in 2014.

This is on the back of “easing financial conditions, in part driven by some reduction in policy rates, a continuation of reforms boosting confidence, and a normal agricultural crop,” it said.

The report further noted India’s GDP growth is likely to accelerate from 5.4 per cent in 2012 to 7.2 per cent in 2014, and remain high through 2015-2016, provided government continues with its reforms push.

A continuation of structural reforms is an important assumption underlying these views, it said.

“While allowing FDI in retail, the Goods and Services Tax, direct cash transfer of subsidies, and dedicated freight corridor will help, we believe further reforms on fiscal consolidation, financial liberalisation and infrastructure growth will be needed to sustain an improvement in trend growth,” the report said.

The government’s recent reforms include allowing FDI in multi-brand retail, aviation, hiking diesel price, capping the number of subsidised LPG cylinders, opening up pension sector to foreign investment and raising the FDI cap in insurance to 49 per cent.

The reforms “which have begun in earnest”, and are likely to progress on a number of different fronts, should help in boosting trend growth.

However, the near-term outlook remains “difficult” due to still weak growth, high inflation, and the twin deficits, Goldman Sachs said and added that quick upturn in the investment cycle is “unlikely”.

India had been growing around 8-9 per cent before the global financial meltdown of 2008. The growth rate in 2011-12 slipped to a nine-year low of 6.5 per cent and in the quarter ended June 30, 2012, the economy grew by 5.5 per cent.

The government expects the economy to expand by 5.5 - 6 per cent this fiscal.

On inflation, the report said headline inflation is likely to remain high through Q3 of 2013, before gradually coming off due to a waning of food and oil shocks.

The WPI Inflation declined marginally to 7.45 per cent in October, from 7.81 per cent in September but was way above the RBI’s comfort zone of 5-5.5 per cent.

“We forecast the Reserve Bank of India to cut policy rates by 50 bp in each of 2013, 2014 and 2015,” Goldman Sachs said adding that “elevated core inflation prevents a more aggressive near-term easing”.

The next mid-quarter review of monetary policy for 2012-13 would take place on December 18.

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