Morgan Stanley cuts India's FY23 growth forecast to 7.6%

Morgan Stanley on Wednesday pared India’s growth forecast for FY23 to 7.6 per cent from 7.9 per cent, estimated earlier. It said that a slowdown in global growth, higher commodity prices and risk aversion in global capital markets expose Asia’s third-largest economy to downside risks.

“The key will likely be from an adverse impact on business sentiment as a slowdown in demand, higher inflation, and the cost of funding impair balance sheet strength and delay the capex recovery. On the domestic side, a change in policy stance by the government or central bank could expose the economy to macro stability risks, leading to slower growth,” it said.

The investment bank said while its baseline forecast for India is 7.6 per cent growth for FY23, its bearish and bullish growth projections are 6.7 per cent and 8 per cent, respectively.

Economic forecasters have been slashing growth projections for India amid rising geopolitical tension that has led to escalating commodity prices.

The Reserve Bank of India (RBI) has revised downwards its growth projection for FY23 to 7.2 per cent from 7.8 per cent earlier.

Last month, the World Bank also slashed its FY23 growth forecast for India to 8 per cent from 8.7 per cent estimated in January. It cited tepid recovery in consumption demand and escalating uncertainties due to the Russian invasion of Ukraine.

Despite the cyclical headwinds, Morgan Stanley, however, sees the Indian economy expanding at above pre-pandemic growth rates in FY23 and FY24.

“We expect support from the government’s supply-side response and the reopening vibrancy to help counter the downside. We expect reopening vibrancy to help the informal sector, in turn supporting consumption growth, which has been a laggard. The government's policy reforms, plus expansion of public infrastructure spending alongside an increase in capacity utilisation levels, should help private capex recover in 6-9 months,” it added.  

For FY24, the investment bank lowered its growth forecast to 6.7 per cent from 7 per cent estimated earlier.

The investment bank has projected global growth at 2.9 per cent in calendar year 2022, less than half of the 6.2 per cent growth in 2021. Morgan Stanley said China's growth may reach merely 4.2 per cent in 2022, about half the pace of last year. 

“The slower growth is very broadly based, and the only two major economies where we do not see substantial slowing are Japan and India,” it added.

But when it comes to inflation, Morgan Stanley said within Asia, India would be the economy which will be most exposed to upside risks to inflation. This is considering the higher energy import burden and sustained strength in domestic demand.

“Building on the impact of adverse terms of trade, we expect both inflation and the current account deficit to deteriorate. We expect broad-based price pressures, which will keep CPI inflation above the 6-per cent mark through October 2022, with average CPI expected to be 6.5 per for FY23. Similarly, reflecting the commodity price pressures, we expect the current account deficit to widen to a 10-year high of 3.3 per cent of GDP in FY23,” it added.

The investment bank expects front-loaded policy rate hikes by the central bank to preserve macro stability, with inflation concerns rising. The RBI raised the repo rate 40 basis points, to 4.4 per cent, in an off-schedule meeting last week.

“We expect front-loaded rate hikes and pencil in hikes of 50 bps each in the June and August meetings, to be followed by back-to-back rate hikes to take the policy rate to 6 per cent by December 2022. We expect the terminal policy rate to be 6.5 per cent,” it said.