Steady Growth and Resilient Demand: A Positive Outlook for India's Economy

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Steady Growth and Resilient Demand: A Positive Outlook for India's Economy

India's economy continues to demonstrate resilience, buoyed by strong domestic demand and stable macroeconomic indicators, according to Morgan Stanley (NYSE: MS ). The firm maintains an optimistic outlook, although it notes potential risks from global factors and the upcoming election outcomes.

Domestic demand-based high-frequency data for April showed a marked increase on both year-over-year (YoY) and month-over-month (MoM) bases. GST collections hit a record high of Rs 2.1 trillion in April, a 12.4% YoY increase. The Manufacturing Purchasing Managers' Index (PMI) remained strong at 58.8, while the Services PMI reached 60.8, driven by robust demand and rising new orders. On the external front, exports grew by 4.1% YoY on a three-month moving average (3MMA) basis in April, compared to just 0.6% in the previous three months.

Inflation metrics were relatively stable in April. The Consumer Price Index (CPI) inflation was at 4.83% YoY, while core CPI stood at 3.2% YoY, both similar to March levels. However, the Wholesale Price Index (WPI) saw an increase, reaching a 13-month high of 1.3% YoY in April, up from 0.5% in March, partially due to the base effect.

The trade deficit widened to $19.1 billion in April from $15.6 billion in March. On an annualized basis, the trade deficit increased to 6.4% of GDP in April from 5.2% in March. Excluding oil and gold , the trade deficit rose to 2% of GDP from 0.3% in the previous month. Morgan Stanley projects the current account deficit for the quarter ending June 2024 to be around 1% of GDP.

Interbank liquidity showed a deficit of $9.3 billion in May, after being in surplus in March and April. The weighted average interbank call rate stayed steady at 6.49%, close to the repo rate. The fiscal deficit, on a 12-month trailing basis, widened to 6.1% of GDP in February 2024 from 5.6% in January 2024, influenced by seasonal factors.

Morgan Stanley remains positive on India's growth prospects, supported by strong domestic demand, as indicated by high-frequency growth data. They project GDP growth of 6.8% for FY 2025 and 6.5% for FY 2026. Inflation is expected to benefit from favorable base effects, with headline inflation anticipated to hover around 5% YoY in the second quarter of 2024, and to soften to 4.1% YoY in the latter half of the year. CPI is projected to average 4.5% YoY for FY 2025-26.

The current account deficit is likely to remain within a manageable range, supported by robust services exports, staying around 1.0-1.5% of GDP for FY 2025-26. Despite the benign macro stability indicators, growth outcomes will influence the monetary policy path. With strong growth trends driven by capital expenditure and productivity gains, Morgan Stanley expects policy rates to remain steady through FY 2025-26.

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