MUMBAI: American Morgan Stanley has lowered its growth forecast for FY’17 to 7.3% from 7.7% earlier on account of currency replacement programme. But it expects investments and capacity expansion in 2018 after a gap of six years of weak trend.“We expect growth recovery to get back on track from 2Q17. We are cutting our forecasts: F2017 GDP growth to 7.3% (from 7.7%) and F2018 GDP growth to 7.7% (from 7.8%)”said Chetan Ahya and Upasna Chachra , of Morgan Stanley in a report. “ We roll out our F2019 growth forecast at 7.9%” they said.It will affect domestic demand in view of disruption in cash transactions until the end of December, they sayd. Besides, there will also be anxiety from the government’s focus on investigating transactions funded by "black money", which will potentially make households hold back spending on big-ticket items in the near term and property spending in the medium term.They see external demand turning around over the last four months, with gains led by non-commodity exports. As global growth accelerates to 3.4% in 2017 from 3% in 2016, Morgan Stanley expect India’s exports to support overall recovery in 2017 after being a drag in 2016.It expects private capacity expansion growth to be weak in 2017, while the government continues to push public capacity expansion in infrastructure. Private capacity expansion recovery will be held back for one more year in view of low industry capacity utilization, plus the weak balance sheets of state owned banks and select industrial sectors. “2018 will be first year of recovery in private capacity expansion after six years of a weak trend” the report said.India’s macro climate is in a better position to face rising US policy rates than in 2013 ("taper tantrum"). However, Morgan Stanly believes that rising US rates mean that the RBI needs to maintain an adequate buffer on real rates and not cut rates aggressively in response to short-term weakness in growth arising from currency replacement.The government will maintain fiscal discipline and continue its effort to revive private capex and productivity-enhancing policy reform process.