Why Morgan Stanley cut India GDP forecast and what it expects RBI and govt to do

The Indian government may have been going to town about record indirect tax collections as a sign of the economy going full steam ahead, but a growing number of global institutions and investors think the country is likely to miss its growth targets for the current financial year. 

After the International Monetary Fund, the World Bank and UBS slashed India’s growth forecasts, global investment firm Morgan Stanley has cut its projections for the country.

Morgan Stanley says that in the financial year 2023, the country’s gross domestic product (GDP) is set to expand by 7.6% instead of the earlier projected 7.9%. 

So, what has Morgan Stanley actually said?

Morgan Stanley said that it has downgraded India’s growth forecast in the wake of a general global growth slowdown, higher commodity prices and a general aversion to risk across the world’s major capital markets. 

In its latest report, Morgan Stanley said that adverse terms of a trade shock, surging prices of crude and an impact on business confidence from geopolitical tensions weigh in on the near-term outlook on growth. 

The brokerage said that a pronounced economic impact, as a result of the Russian invasion of Ukraine that has led to a surge in global crude oil prices, has pushed up retail prices in India, the third-biggest crude importer. The retail inflation in the country is at its highest levels in the last 17 months. 

Upasana Chachra, Morgan Stanley’s chief economist for India, said in a note that the key drivers of impact will likely be inflation, weaker consumer demand, tighter financial conditions, the adverse impact on business sentiment as well as a delay in capex recovery. 

Has Morgan Stanley given a breakdown of its growth estimates?

Morgan Stanley has said that they expect global growth to average 2.9% on a year-on-year basis in 2022, slowing down from 6.2% in 2021. 

It, therefore, thinks that India’s projected growth for 2023 will be marked down from 7.9% to 7.6% and further down to 6.7% in 2024. 

What more has Morgan Stanley said on inflation?

On inflation, Morgan Stanley has said that in Asia, India will be the economy which will be the most exposed to upside risks to inflation on account of a higher energy import bill. This is because India meets almost 80% of its energy needs from imports and a rise in crude prices pushes up the country’s trade and current account deficits, while also hurting the rupee and fuelling downstream inflation. 

What does Morgan Stanley expect the Indian government to do?

The brokerage says it expects the Indian government to support on policy reforms and by expanding public infrastructure spending alongside an increase in capacity utilisation levels. This, it hopes, will help private sector capex spending recover over the next 6-9 months. 

What does it expect the central bank to do?

Morgan Stanley expects front-loaded rate hikes of 50 basis points each in June and August, to be followed by back-to-back rate hikes, to take the policy rate to 6% by December 2022. The RBI earlier this month increased its benchmark repo rate to 4.4% from 4% in an off-cycle policy move.