- The pandemic was an exogenous shock and, as it is now fading, says a report by Morgan Stanley.
- It says that India’s household balance sheets are healthy and a conducive macro backdrop will keep consumer confidence high.
- It highlights how India is best positioned among its Asian peers to deliver domestic demand alpha.
“The pandemic was an exogenous shock and, as it is now fading, households and corporations are well positioned to start spending again. We believe the prolonged cyclical slowdown over 2013-19 led to pent-up demand, especially for housing, consumer durables like autos, and capital goods,” said the report.
Morgan Stanley is optimistic that India's consumption will pick up in the coming quarters, as the economy is now fully reopened and supported by job creation and income growth.
“Specifically in the case of consumer durables, we expect that the trend growth rate will be sustained at a higher level given that household balance sheets are healthy and a conducive macro backdrop will keep consumer confidence high,” it said
‘RBI need not lift rates deeply into restrictive territory’
This confidence comes from cooling crude oil and commodity prices, which have come down from their historic highs in March 2022 by 23-37%.
This, Morgan Stanley predicts, will help India’s macro factors like inflation and forex reserves, will head back towards the comfort zone and India’s central bank may not have to intervene and resort to another rate hike.
“Against this backdrop, we project that RBI does not need to lift rates deeply into restrictive territory. In other words, RBI will not need to slow domestic demand growth meaningfully to control macro stability indicators,” said the report.
Since May 2022, RBI has hiked its repo rate cumulatively by 140 basis points in quick succession, lifting policy rates now to 5.4%, which is a touch above pre-pandemic levels.
However, Morgan Stanley analysts feel that there are more on the way.
“Our forecast is that the RBI will hike interest rates to 6.5%, which coupled with our inflation projections would mean that real rates will turn positive by 4Q22and rise to 100bps by 2H23, which we think would help mitigate some of the concerns on macro stability risk,” said the report.
A sunny macro outlook, better than Asian countries
As external risks recede, India’s gross domestic product (GDP) growth is poised to average to 7% in the coming months.
“Over 2022-23, India’s growth will average 7%, the strongest among the largest economies, contributing 28% and 22% to Asian and global growth,” said the report.
The report says that India is best placed to generate domestic demand alpha and its cyclical recovery will be sustained by structural factors.
The country’s car sales are 24% above pre-Covid levels, which is the strongest in Asia. Two-wheelers are also running strong at 25% above pre-Covid levels. Even property new sales and launches have reached 11 and 8-year highs, respectively.
“The strength of the recovery provides a comforting backdrop and represents the strongest performance of the economy in almost a decade. What’s more, it is the breadth of the recovery where we are seeing growth firing on almost all cylinders, which is very encouraging,” said the report.