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Friday, May 20, 2022

Morgan Stanley: GDP growth to fall to 7.4%; 6% repo by Dec

Within Asia, India would be the economy which will be most exposed to upside risks to inflation, given the higher energy import burden and sustained strength in domestic demand, Morgan Stanley said in its report.

By: ENS Economic Bureau | Mumbai |
Updated: May 12, 2022 5:30:25 am
It expects front-loaded rate hikes, “as we pencil in hikes of 50 bps each in June and August, to be followed by 25 bps increases thereafter”.

Global investment banking group Morgan Stanley has slashed India’s gross domestic product (GDP) growth for 2022 to 7.4 per cent from 7.5 per cent earlier and for 2023 to 6.7 per cent from 7.1 per cent in the wake of elevated inflation level of over 6 per cent and forecast the policy Repo rate to rise to 6 per cent by December 2022.

Within Asia, India would be the economy which will be most exposed to upside risks to inflation, given the higher energy import burden and sustained strength in domestic demand, Morgan Stanley said. “Although we look for a modest step down from 8.1 per cent growth in India last year to 7.4 per cent this year, that deceleration is much more modest than in the rest of the world. Higher commodity prices and uncertainty are a bit of a restraint, but the underlying fundamentals remain solid,” it said in a report.

Morgan Stanley expects front-loaded rate hikes as we pencil in hikes of 50 bps each in June and August, to be followed by 25 bps increases thereafter. “As such, we now expect the policy rate to reach 6 per cent by December 2022 and expect the terminal policy rate to be 6.5 per cent,” it said.

With inflation consistently rising above the upper end of the target range of 2-6 per cent, the RBI raised the repo rate by 40 bps to 4.4 per cent, in an off-schedule meeting in May as inflation concerns took centre-stage.

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Morgan Stanley said the cyclical recovery is expected to continue at a slower pace, reflecting slower momentum in discretionary consumption, private capex, and export growth. “We see the economy expanding at above pre-pandemic growth rates in 2022 and 2023. Despite the cyclical headwinds, we expect the economy to expand above pre-pandemic growth rates as support from the government’s supply-side response and the reopening vibrancy help to counter the downside,” it said.

“We expect reopening vibrancy to help the informal sector, in turn supporting consumption growth, which has been a laggard. The government’s supply side-oriented policy reforms, expansion of public infrastructure spending alongside an increase in capacity utilization levels should help a private capex recovery in 6-9 months,” the report said.

On inflation, it said, “building in the impact of prolonged supply-side disruptions leading to higher global commodity prices, we expect headline CPI to edge higher and remain above the upper threshold of 6 per cent until October 2022. As such, we expect headline CPI to average 6.6 per cent in 2022 versus 5.1 per cent in 2021,” it said.

Within CPI, food prices are expected to rise given the imported component in the food basket in the form of edible oils and pulses and input price pressures which are likely to accelerate cost of production. In a similar vein, fuel CPI is also likely to remain elevated in the coming months, even as the stabilization in global oil prices helps to moderate fuel inflation gradually on a year-on-year basis, Morgan Stanley said.

Furthermore, core inflation is expected to edge higher above previous year levels, driven by an uptick in core services inflation on improving services demand even as core goods inflation decelerates sequentially from a high base. “We expect the current account deficit to widen to 3.1 per cent of GDP in 2022, with the net oil import burden rising to 4.9 per cent of GDP from 3.1 per cent in 2021,”

Domestic demand has lifted off with the help of reopening and has become more evident in the incoming data. Encouragingly, capacity utilisation is rising too, which, among other reasons, will help start a capex cycle, it said. Moreover, India had been taking up structural reforms even before the pandemic hit, and the benefits of these reforms will now accrue as the cyclical recovery takes hold, it said.

“One of our concerns a few weeks back was that the RBI might fall behind the curve in addressing inflation. However, these fears have been alleviated with the recent surprise 40 bps rate inter-meeting hike, which opens the prospects of further actions of the central bank in addressing price stability concerns,” Morgan Stanley said.

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