Morgan Stanley cuts India's 2012 GDP forecast to 7.4%

Investment banking major Morgan Stanley has revised downwards its India's economic growth forecast for 2012 to 7.4%.

The global brokerage firm has also reduced its year-end target for the Bombay Stock Exchange benchmark Sensex by 15% to 18,850.

Morgan Stanley reduced its forecast for India's gross domestic product growth for 2012 to 7.4% from 7.8% amid high inflation and weak global capital markets environment.

Its new Sensex target for December 2011 is down 15% to 18,850 points and the December 2012 target is 22,750.

"Reflexivity is at work – lower share prices are affecting growth and vice versa," Morgan Stanley said in a research note.

"Earnings have support from decade-low gross margins and strong balance sheets, but face headwinds from fragile global growth. We think broad-market earnings growth may have troughed," Morgan Stanley added.

The Sensex has fallen 2% to 16,141.67 points today. The 30-share benchmark index has tanked as much as 31% from its November 2010 high of 21,108.64 points.

Key positives for Indian equities outlined by the brokerage include surging corporate activity and good progress in sowing season, which bodes well for respective rural incomes and taming food inflation.

According to the report, the main factors that could adversely impact the markets include oil prices, inflation, high rates, slowing growth and alleged corruption scandals.

"During the 2008 crisis, Indian earnings outperformed, but equities fell due to a large outflow of capital... Massive global stimulus or a breakdown in capital markets will hurt India on a relative basis a la 2008," the report said.

Regarding the growth prospects of emerging market economies, including India, Morgan Stanley said that emerging market economies will not be immune to the developed market slowdown and the countries with higher global exposure will be ones which will be most hurt.

"The countries which are more externally oriented such as Korea, Singapore, Malaysia, Taiwan and Thailand will see a greater adjustment in their growth outlook compared with the economies with higher dependence on domestic demand, such as China, India and Indonesia," the report said.

Morgan Stanley expects emerging market growth to fall to 6.4% this year from 6.6% previously.