Investment activity has seen an upturn since 2016-17 and is likely to last till 2022-23, a working paper by the Reserve Bank of India (RBI) said on Tuesday.

"The upturn in the current investment cycle, which began in 2016-17, is estimated to last up to 2022-23 when the investment rate is estimated to increase up to 33 per cent from the current level of 31.4 per cent," the RBI study said.

For a domestic demand driven Indian economy, consumption and investment play key roles in growth dynamics, the paper titled 'India's Investment Cycle: An Empirical Investigation' said.

"Investment activity, in particular, is significant as it not only plays an important role in shaping the current growth rate of the economy, but also in boosting the country's medium-term growth prospects," it said.

The RBI study by Janak Raj, Satyananda Sahoo and Shiv Shankar examines the duration of the investment cycle and the major determinants of investment activity in the Indian context. It tries to find whether the current upturn is sustainable and how long this investment cycle would last.

The authors say "there is hardly any study at the aggregate level on investment cycle either in advanced or emerging economies, including India".

The real investment rate in India generally trended upwards to peak at 36.7 per cent in 2007-08 before declining to 30.3 per cent by 2015-16 due to factors such as the global financial crisis, twin balance sheet problem -- high leverage by the corporate sector and high non-performing assets (NPAs) of the banking sector -- and subdued domestic capital market conditions, it said.

"The slowdown in the investment rate was one of the major factors, which pulled down India's growth rate from a high of 9.3 per cent in 2007-08 to a low of 6.7 per cent in 2017-18."

The study said the challenge is to reverse the declining trend component of investment activity which will require policy efforts on multiple fronts like ease of doing business, distressed assets, NPAs and stalled projects.

"These measures will help ride the current phase of the investment cycle to its peak and boost medium-term prospects of investment activity. However, uncertainties on the global front and financial market volatility need to be guarded against," it said.

The study finds average duration of investment cycle in India was three years and while the average duration of speed-up (from trough to peak) was 1.6 years (seven quarters), the average duration of slowdown (from peak to trough) was 1.4 years (five quarters).

Four phases of downturn in the post-liberalisation period (first half of 1990s, early 2000s, 2007-08 to 2009-10 and 2011-12 to 2015-16) have been of severe magnitude, it said.

The paper observed that investment activity in India is affected by several macro-financial factors -- real GDP growth, real interest rate, bank credit growth, global GDP growth and gross fiscal deficit (GFD).

"Domestic economic activity turned out to be the main determinant of investment activity in India. The real interest rate had a negative impact on investment activity. Non-food bank credit growth positively impacts investment activity. The GFD crowds out investment demand," it noted.

A one percentage point increase in the real lending rate reduces the real investment rate in the range of 0.29-0.40 percentage points, it added.