Morgan Stanley slashes India's GDP growth forecast to 7.9% for FY23

“Even as we expect the cyclical recovery trend to continue, we expect it to be softer than we previously projected," Morgan Stanley said in a report.

"We believe that the ongoing geopolitical tensions exacerbate external risks and impart a stagflationary impulse to the economy," it was quoted as saying by a news agency.

India is affected through three key channels—higher prices for oil and other commodities; trade, and tighter financial conditions, influencing business/investment sentiment.

"Building in higher oil prices, we trim our F23 GDP growth forecast 50bps, to 7.9 per cent, lift our CPI [consumer price index] inflation forecast to 6 per cent, and expect the current account deficit to widen to 10-year high of 3 per cent of GDP," it said.

India is 85 per cent dependent on imports to meet its oil needs and the recent spurt in international oil prices, which pushed rates to a 14-year high of $140 per barrel before retracting, will result in the country paying more for the commodity. Also, higher prices will result in inflationary pressure.

The key channel of impact for the economy will be higher cost-push inflation, feeding into broader price pressures, which will weigh on all economic agents—households, business and government.

"As such, we do not expect that fiscal or monetary policy will need to tighten disruptively to manage macro stability risks. The risk would stem from a further sustained rise in oil prices, leading to quick deterioration in macro stability and currency volatility," it said.

The brokerage expected a repo rate hike in the June meeting of the Reserve Bank of India’s monetary policy committee. "But we now expect the April policy to mark the process of policy normalization with a reverse repo rate hike," it said.

"However, if the RBI were to delay its normalization process, the risk of disruptive policy rate hikes would rise. We see less room for fiscal policy stimulus to support growth given high deficit and debt levels," it added.

ALCHEMPro News Desk (DS)