Morgan Stanley, a top multinational financial services firm, published a note on Wednesday announcing that India’s worst period of macro instability is probably over and predicting that consumer inflation and the trade deficit would gradually subside.
Upasana Chachra, the chief India economist at Morgan Stanley, said in the document that global commodity prices, except fuel prices, were “largely stable last month.” In August, the global commodity prices, including food and metal prices, dropped by 9-25%.
Oil prices, too, fell by 8%. Chachra said, “These fuel-related global commodities constitute 13.2% of India’s CPI (consumer price index) and 33.8% of the WPI (wholesale price index) basket.”
Inflation cools to 6.71%, industrial growth expands 12.3%, normal rain boosts agri sector & rural demand. Good news for India. Depressing news for some pic.twitter.com/XvqeR7e2GD
— Minhaz Merchant (@MinhazMerchant) August 13, 2022
Moreover, the government has directed the central bank, the Reserve Bank of India, to ensure that retail inflation remains at 4%—with a 2% margin—until March 2026. Chachra also pointed out that the Indian Rupee also stabilised in August. However, contrary to her claim, the Indian Rupee further fell against the US Dollar on Friday, opening at 79.76. Last month, the Indian currency dropped to a record low of 80.07.
The Morgan Stanley economist noted that India’s trade deficit was at its highest in July, touching $30 billion, prompting economists to revise India’s current account deficit and balance of payments projections.
However, the note clarified, “We believe that lower commodity prices and a partial roll back of taxes on petroleum products will help improve the trade balance trend.”
India’s Index of Industrial Production surged to 12.3% in June. Furthermore, in July, consumer inflation dropped to a five-month-low at 6.71% from 7.01% in June. The consumer inflation rate is a key factor in determining the RBI’s bi-monthly monetary policy. To counter inflation, the Monetary Policy Committee last week raised the repo rate, the rate at which the RBI provides loans to commercial banks, to 5.40%, marking an increase of 50 basis points.
Insightful session by the experts on “Recent Measures taken by RBI to strengthen its Forex Reserves including Rupee settlement” organised by IMC today.#imcevents pic.twitter.com/IHareBXH42
— IMC Chamber of Commerce and Industry (@IMC_India) August 17, 2022
To this end, the Morgan Stanley note projected that India’s consumer inflation rate would surge to 7-7.2% in August and stay steady at 7% in September before dropping gradually. Concerningly, the inflation rate has been over the RBI’s “tolerance band” since December last year.
The note by the research house comes just a week after economists from the organisation published another document declaring that India is on its way to becoming Asia’s strongest economy in 2022-2023. It attributed this to several factors, including its young workforce, business investment, and economic policy reforms such as lowering corporate taxes.
In fact, Chachra’s note said, “Lower corporate taxes, the production-linked incentive (PLI) scheme, and India as a potential beneficiary of supply chain diversification will catalyse and sustain domestic demand, especially in investment.” She also predicted that domestic consumption and services export would surge.
"The strength of the recovery provides a comforting backdrop and represents the strongest performance of the economy in almost a decade…it is the breadth of the recovery…we are seeing growth firing on almost all cylinders, which is very encouraging.” https://t.co/UoaMDz0XPb
— Nirmala Sitharaman (@nsitharaman) August 11, 2022
As a result, India could witness an average GDP growth of 7% in 2022-2023. Moreover, it will contribute 28% to Asian growth and 22% to global growth. In this regard, Chachra asserted, “The economy is set for its best run in over a decade as pent-up demand is being unleashed.”
While India followed other countries in raising interest rates to combat surging inflation, the $529.7 billion budget focused on increasing public investment.
India is Asia’s third-largest economy. In the 2022 fiscal year, it witnessed a 9.2% economic growth, a sharp rise from the previous year, when COVID-19 lockdowns and economic slowdowns caused India’s economy to grow by a meagre 6.6%. GDP growth in 2022-2023 is projected at 8-8.5%.