New Delhi, Apr 29: On the back of strong government spending and investment activity, the global slowdown will only have a modest effect on Indian economy whereas the country's GDP is expected to ease to 7.8 per cent this year, says global credit rating agency Moody's in its latest report.

The report by Moody's economy.Com noted that slowing exports and tight monetary policy are the key downside risks to expansion this year.

Further, government's current priority to improve infrastructure and reduce poverty would witness strong demand for workers and household income grow at a stunning pace this year.

Public expenditure would receive a major boost in anticipation of the General Election to be held in May 2009, the report said.

"...However, thanks to strong government spending and investment activity, the global slowdown will have only modest effect. India's GDP growth is expected to slow to around 7.8 per cent in 2008, and rebound to 8 per cent the following year as the global economy rebuilds momentum," the report titled 'India outlook: A challenging time ahead' noted.

Meanwhile, the Reserve Bank of India today raised the Cash Reserve Ratio (CRR) by 0.25 per cent to 8.25 per cent in its annual monetary policy. The new CRR would be effective from May 24.

Pointing out that domestic demand is a key driver of expansion in the country, the report said that amid rapid wage growth, household demand would be solid.

However, strong inflation coupled with high borrowing costs would weigh on household budgets and dampen consumer spending.