Strong Domestic Demand Supporting India's Growth: Morgan Stanley

Morgan Stanley is firm on India's growth outlook, given the support it is getting from domestic demand. Citing high-frequency data, the global investment banking firm said it remains constructive on the growth outlook.

Against that backdrop, it expects India's GDP growth to be at 6.8% in the current financial year 2024-25 and 6.5% in 2025-26.

On the macro side, it anticipates headline inflation to remain supported by favourable base effects. It projected inflation to be around 5% in the second quarter, before moderating to 4.1% year-on-year in the second half of 2024.

For the next financial year, it expects retail inflation to average at 4.5%.

Similarly, the current account deficit will likely remain benign, supported by strength in service exports, and within the policymakers' comfort zone at 1-1.5% of GDP in 2025-26.

On monetary policy, it expects policy rates to remain steady at 6.5%.

"This is on the back of a shallower and deferred rate cut cycle for the Fed on the global front and improving productivity growth, a rising investment rate and inflation tracking above the target of 4% on the domestic front," it explained.

Inflation remains the main concern for the Reserve Bank of India's monetary policy committee members before it goes ahead and loosens its stance on key interest rates. As per the minutes of the latest monetary policy meeting released on Friday, there have been several mentions of uncertainties around inflation. Going ahead, food price uncertainties would continue to weigh on the inflation outlook, it said.

Pressure on food prices has been interrupting the ongoing disinflation process in India, posing challenges for the final descent of the inflation trajectory to the 4% target.

The RBI is currently focused on bringing down inflation to a 4% target on a durable basis.

Retail inflation in India is in RBI's 2-6% comfort level but is above the ideal 4% scenario. In March, it was 4.85%. Inflation has been a concern for many countries, including advanced economies, but India has largely managed to steer its inflation trajectory quite well.

Meanwhile, along anticipated lines, RBI kept the policy repo rate unchanged at 6.5% earlier this month, the seventh time in a row. The repo rate is the rate of interest at which the RBI lends to other banks.

Barring the latest pauses, the RBI raised the repo rate by 250 basis points cumulatively to 6.5% since May 2022 in the fight against inflation. Raising interest rates is a monetary policy instrument that typically helps suppress demands in the economy, helping the inflation rate decline.

India's economy grew 7.2% in 2022-23 and 8.7% in 2021-22, respectively. As per the second advance estimates, real gross domestic product (GDP) expanded at 7.6% in 2023-24 on the back of a buoyant domestic demand.

India is set to remain the fastest-growing among major economies in 2024, according to the International Monetary Fund's latest World Economic Outlook.

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