New Delhi:
Higher oil prices due to the ongoing conflict between Russia and Ukraine, tighter financial conditions and trade will impact India’s GDP in the coming financial year of 2022-2023, Morgan Stanley said, as the growth forecast is slashed by 50 basis points to 7.9 per cent.
It has also raised its retail inflation forecast to 6 percent and expects the current account deficit to widen to 3 percent of GDP.
“While we expect the cyclical recovery trend to continue, we expect it to be softer than we previously forecast,” it said in a report, adding that “we believe the ongoing geopolitical tensions exacerbate external risks and provide a stagflationary impulse.” give to the economy”.
India is affected through three main channels: higher oil and other commodity prices; trading and tighter financial conditions, affecting business/investment sentiment.
“By building in higher oil prices, we are lowering our F23 GDP growth forecast by 50 basis points to 7.9 percent, raising our consumer price index (CPI) inflation forecast to 6 percent and expecting the current deficit to widen. bill will rise to a 10-year high of 3 percent of GDP,” the report said.
India is 85 percent dependent on imports to meet its oil needs, and the recent surge in international oil prices, which pushed yields to a 14-year high of $140 a barrel before pulling out, will cause the country more will pay for the raw material. Higher prices will also lead to inflationary pressures.
The main effect on the economy will be higher cost inflation, which will lead to broader price pressures, weighing on all economic actors – households, businesses and government.
Regarding India’s exposure to macro stability risks, Morgan Stanley said that even if macro stability indicators are expected to deteriorate, a lack of domestic imbalances and a focus on improving productivity dynamics will help mitigate risks.
“As such, we do not expect that disruptive fiscal or monetary policy tightening will be required to manage macro stability risks. The risk would stem from further sustained increases in oil prices, leading to a rapid deterioration in macro stability and currency volatility.” said.
The brokerage expected a hike in the repo rate during the June meeting of the Reserve Bank of India (RBI) monetary policy committee.
“But we now expect April’s policy to mark the process of policy normalization with a reverse repo rate hike. However, if the RBI were to slow its normalization process, the risk of disruptive policy rate hikes would increase. We see less room for fiscal policy stimulus to boost growth given the high deficits and debt levels – we see an opportunity of modest fuel tax cuts and reliance on the national rural employment program as an automatic stabilizer,” Morgan Stanley said.
The report saw upside risks of 0.5 percent of GDP over the budget deficit target of 6.4 percent of GDP for 2022-2023 (April 2022 to March 2023).
“We see risks to growth pointing downwards and upwards to inflation and the CAD. Again, the main risk would be a sharp and sustained rise in oil prices, exacerbating macro stability concerns and leading to disruptive monetary tightening Furthermore, there are risks that could arise if global growth conditions weaken further, which would hurt India’s export and investment cycle,” the agency noted.