Morgan Stanley, the U.S. investment management and financial services company, has cut India's GDP forecasts by 40 basis points to 7.2% for the financial year 2022-23, and by 30 bps to 6.4% for FY2023-24 on the back of slower global growth.
Morgan Stanley’s current projections are in line with the Reserve Bank’s estimates for FY23. As per the RBI’s estimates, the Indian economy is set to grow at 7.2% for FY23, from earlier guidance of 7.8%.
Morgan Stanley's inflation forecast for FY23 for India has fallen to 6.5% from 7% earlier, primarily because it sees moderation in commodity price increases improving the near-term trajectory on the macro level.
"Building in the moderation in commodity prices and swifter correction in domestic food prices, we see the near-term inflation trajectory improving," says the report, adding there may not be much change in inflation beyond FY23.
"We now expect CPI inflation to average 6.5% in F23 (vs. 7% earlier). (We) expect it to average 5.3% in F24," says Morgan Stanley. It adds near-term risks to the inflation trajectory stem from changes in commodity prices and domestic food prices.
The central bank, in its latest monthly bulletin, says India’s monetary policy committee will be able to bring inflation back to target within a two-year time span. India’s retail inflation had moderated to 7.01% in June 2022 from 7.04% in May this year.
It says that domestic demand, however, will provide a partial offset. "We expect support from the government's supply-side response and the reopening vibrancy to partially counter the downside. We expect reopening vibrancy to help the informal sector, in turn supporting consumption growth, especially in the services segment.”
On the global level, Morgan Stanley says it expects global growth to slow to 1.5% YoY in QE December 2022 from 4.7% in QE December 2021. "We see three channels of transmission: 1) slower trade growth; 2) tighter financial conditions; and 3) changes in commodity prices.”
The global financial services company says the government's policy reforms and expansion of public infrastructure spending alongside a trend of supply-chain diversification should provide support to private capex. "We thus expect GDP growth at 7.2%Y in FY2023 (vs. 7.6% earlier) and 6.4%Y in FY2024 (6.7% previously)," says the report.
On the rupee sliding against the U.S. dollar, the Morgan Stanley report says the correction in commodity prices has eased the pressure on macro stability, but the global risk-off sentiment has weighed on the domestic currency.
"We expect monetary policy normalisation to continue, pegging the terminal repo rate at 6.5%, which we expect to be reached by April 2023. We believe that normalisation in real rates will help preserve macro stability and provide a basis for durable growth recovery.”
Previously, several ratings agencies and financial institutions have also slashed India's growth projections due to the global downturn amid supply-chain stocks and high inflation. The World Bank last month trimmed India's GDP growth forecast for FY23 to 7.5% from 8%. Paris-based financial organisation OECD said India's real GDP will grow by 6.9% in FY23 and 6.2% in FY24, as the country’s economy loses momentum due to high inflation, and rising global energy and food prices.
