FY25 likely to witness close to 7% economic growth, but risks remain
Morgan Stanley Research on Monday said it expects India’s economic growth at around 6.5% for FY2024 and FY2025, citing strong domestic fundamentals.
The research arm of the investment bank, in its 2024 India Economics Outlook, said the domestic demand supported by strength in corporate and financial sector balance sheets and the follow-through of policy reform measures will aid India’s growth amid a global slowdown.
The latest forecast from Morgan Stanley comes amid an escalation of conflict in Israel that threatens to impact oil prices.
High oil prices not only increases inflation but also results in higher import bills, leading to higher fiscal deficit and balance of trade challenges, which impact the economy.
Recently, Moody’s Investor Services retained India’s economic growth at 6.7% for 2023, citing the country’s remarkable resilience amid a global slowdown buoyed by solid domestic demand.
The International Monetary Fund (IMF) has also raised its 2023-24 growth projection for India, to 6.3% from its July estimate of 6.1%, citing stronger-than-expected consumption during Q1.
The Reserve Bank of India (RBI) estimates growth at 6.5% for FY24.
Morgan Stanley expects headline inflation to moderate to 4.9% in FY2025 from 5.4% in FY2024.
“On the external balance sheet side, we expect the current account deficit to remain in a range of 1.5-1.7% of GDP in F2025-26, steady terms of trade, and strength in net service exports,” it said.
“India’s inclusion in the GBI-EM index from Jun-24 will likely support the balance of payments by augmenting capital flows and thus aiding the funding profile,” it added.
In September, JPMorgan Chase & Co. said it will add Indian government bonds to its benchmark emerging-market index from June 2024.
The inclusion of Indian bonds in JPMorgan’s emerging market debt index is expected to bring in more foreign inflows into the country.
Meanwhile, Morgan Stanley expects India’s central bank, The Reserve Bank of India (RBI), to keep interest rates steady till the first half of 2024.
“However, we maintain our expectation of a shallow rate cut cycle from June-24, driven by visibility of sustained moderation in inflation. We build in two rate cuts of 25bps each, which will keep real policy rates averaging at about 100bps in 2024,” it said.
“Risks of a delayed start to the easing cycle could emerge from higher commodity prices (especially oil) pushing up inflation and/or tighter global financial conditions weighing on the currency and adversely impacting macro stability,” it added.
The RBI has kept the repo rate unchanged at 6.5% since February.
However, any surprise outcome in the upcoming general elections in May 2024 could have implications for growth and macro stability, Morgan Stanley said in the report.
“A strong political mandate supporting reform measures alongside improvement in external demand would drive faster growth,” it said.
“The downside scenarios driven by a delay in the Capex cycle from weaker business confidence due to a surprise political outcome or a drag from the external environment,” it added.
Morgan Stanley also expects private consumption growth to gather pace in the coming quarters, as the gap narrows between rural and urban demand and between goods and services.
It also expects the private Capex to pick up in a sustained manner creating a virtuous cycle of growth, and exports trends to stabilise without being a drag on growth.
“In our view, an important support for growth expansion to be sustained is a well-calibrated policy response, which helps to maintain a sort of ‘goldilocks’ environment with a healthy trend in growth, moderating inflation, and a manageable current account deficit,” the report said.
“As inflation has remained largely within the comfort range of the central bank, the RBI has kept rates steady since Mar-23. Indeed, the rising uncertainty from external factors and tighter global financial conditions have kept the RBI on vigil with a focus on liquidity management. In our view the RBI will remain cautious and focus on maintaining real rates in positive territory for the domestic economy,” it added.
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