Morgan Stanley cuts 2017 CPI forecast to 3.1% on benign GST, monsoon impact

And, for 2018, it cut forecast to 4.3% from 4.6% earlier

Global brokerage firm Morgan Stanley has lowered its inflation forecast for 2017 to 3.1 per cent from 3.6 per cent earlier citing relatively benign outcomes of goods and services tax (GST) and monsoon.

It, however, said headline inflation troughed in June and the trajectory is still that of a gradual rise in headline inflation.

Morgan Stanley Research has revised the headline consumer price index (CPI) forecast for the calendar year 2017 to 3.1 per cent from 3.6 per cent earlier and for 2018 to 4.3 per cent from 4.6 per cent earlier.

For the ongoing financial year (FY), it expects headline CPI at 3.2 per cent from (4 per cent earlier) and for 2018-19 to 4.3 per cent from 4.5 previously.

Two factors led to the revision of forecast — first, the slippage in food inflation year-on-year has been more persistent and secondly, the impact of GST, rise in house rent allowance (HRA) and the ongoing monsoon on inflation was benign, it said.

"We expect that headline inflation troughed in June and that sequential rises in food inflation and the fading of high bases of comparison will mean that food and, by extension headline CPI inflation, will gradually increase from here," it said.

Retail inflation hit a historically low level of 1.54 per cent in June on dip in prices of food items like vegetables, pulses and milk products.
 

Regarding Reserve Bank of India's (RBI) monetary policy stance, the report said recent slippage in inflation has opened up room for one more rate cut. "It is in this context that we expect RBI to take up one more rate cut at the August meeting," it said.

Beyond the likely August rate cut, Morgan Stanley does not expect any further material easing of monetary policy in its base case.

In its June monetary policy review, RBI left key rates unchanged with Governor Urjit Patel noting that the central bank wanted to be surer that inflation will stay subdued.