India’s GDP growth rate is likely to accelerate gradually and inflation is expected to remain below 5 per cent over the next two years, says a Morgan Stanley report.
According to the global financial services major, factors like discretionary consumption, public sector capex and foreign private investment flows are supporting the India growth story, while weak external demand conditions in the global markets are holding back the pace of growth.
“Growth trajectory is showing signs of a recovery led by public capex and discretionary consumer spending, however, the pace of recovery remains slow.
“We believe that headwinds from weak external environment are holding back the pace of recovery,” Morgan Stanley said in a research note.
The report noted that India is likely to see a longer- duration expansion cycle with low risks of “overheating” in the next two years considering the overall policy approach of the government and the Reserve Bank.
“We expect a slightly slower pick-up in growth trajectory, given the trailing weakness from external demand and private capex,” Morgan Stanley said, adding the GDP growth rate is expected to accelerate gradually and inflation is likely to remain below 5 per cent over next two years.
On prices, it said, the CPI inflation is likely to continue on its path of moderation thanks to various factors like moderation in rural and urban wages, fiscal consolidation, positive real rates, slower global commodity price growth in year-on-year rupee terms and moderation in property prices.
Morgan Stanley expects CPI inflation to decelerate to 4.9 per cent in the quarter ended March 2016.
On the Reserve Bank’s policy rate stance, the report said that given that the CPI inflation is likely to stay below the central bank’s inflation forecast, there is a likelihood of a further 25-50 bps rate cut in the first half of 2016.
“Given our CPI inflation forecast at 4.9 per cent in quarter ended March 2016 and 4.75 per cent in quarter ended March 2017, is below central bank’s inflation forecast of 5.8 per cent for quarter ended March 2016, we expect a further 25-50 bps of rate cuts through first half of 2016,” the report noted.
The RBI’s next bi-monthly policy review is on February 2.