Morgan Stanley cuts India’s FY16 GDP growth forecast to 7.5%


  • 02 Sep 2015

The Indian economy is expected to clock a 7.5 per cent GDP growth in this fiscal year, slightly lower than the previous estimate of 7.9 per cent largely because of bad weather and weak external demand, Morgan Stanley said in a report.

According to the global financial services firm, the continued weakness in external demand and slowdown in rural consumption spending with cuts in government's redistribution policies are holding back the pace of recovery.

Moreover, the recent weakness in rainfall trends has raised concerns on agriculture output growth and may affect rural consumption, it added.


"In this context, we are revising our growth estimates slightly for F2016 to 7.5 per cent (from 7.9 per cent earlier) and for F2017 to 8.1 per cent (from 8.4 per cent earlier)," Chetan Ahya, Chief Economist for Morgan Stanley in Asia said in a research note.

The revision in growth estimate was mainly because of poor weather affecting agriculture output and weak external environment.

According to Morgan Stanley, the GDP growth forecast is likely to accelerate from 7.3 per cent in 2014-15 to 7.5 per cent in F2016 and 8.1 per cent in F2017, "making India one of the few emerging market economies to achieve higher productive growth trajectory".


"We expect this improvement in growth trajectory to be driven by pickup in capex, urban consumption and stabilisation of exports," the report added.

The report noted "the pace of policy actions to revive productivity dynamic, strength of external demand recovery and trend in capital inflows into emerging markets are the factors that will influence the growth outlook".

According to Morgan Stanley, inflation is likely to remain below 5 per cent year-on-year over the next two years and accordingly the central bank is likely to lower rates by a further 50-75 bps by March 2016.


"Based on our expectation of sustained deceleration in CPI inflation to 4.8 per cent by the quarter ending March 2016, we expect the central bank to lower rates by a further 50-75 bps by March 2016," the report said.

RBI Governor Raghuram Rajan, who has been under pressure from the government and the industry to further cut rates, said this weekend that RBI remains in an "accommodative mode" and would take a decision as per the data on inflation and other macroeconomic factors.

RBI, which has lowered rates thrice so far this year by 25 basis points each, is scheduled to hold its next bi-monthly monetary policy review on September 29. However, two of the three rate cuts this year have been announced outside the scheduled reviews.


Japanese brokerage Nomura says India to grow 7.8%

A cyclical recovery is under way for the Indian economy, and the country's GDP growth is expected to improve to 7.8 per cent this fiscal from 7.3 per cent in 2014-15, a Nomura report says.

According to the Japanese brokerage firm, the PMI data for August reinforce the view that cyclical recovery is in progress for the Indian economy led by improving consumption demand and rising profit margins owing to low inflation and falling interest rates.


The Nikkei India Manufacturing PMI -- a composite monthly indicator of manufacturing performance -- stood at 52.3 in August, down from a six-month high of 52.7 in July.

According to Nomura, historically, the manufacturing PMI has fallen in August and the decline this year has been much smaller than the average fall of 1 point in the last six years.

"Therefore, we believe that the PMI data signal improving manufacturing activity," it said.

"We expect a gradual recovery in GDP growth to 7.8 per cent in FY16 from 7.3 per cent in FY15, led by higher corporate profits, policy easing, debottlenecking of stalled projects and rising discretionary demand."

On RBI's policy stance, the report said the central bank is likely to cut its repo rate by 25 bps at its review later this month, following which it's "likely to be on hold".

"With CPI inflation likely to undershoot the Reserve Bank's 6 per cent inflation target for January 2016 and pipeline price pressures remaining weak, we expect RBI to cut its repo rate by 25 bps on September 29 and then go on hold," Nomura economists Sonal Varma and Neha Saraf said in a research note.

RBI, which has lowered the benchmark rate by a combined 75 basis points so far this year in three instalments, is scheduled to hold its next bi-monthly monetary policy meet on September 29.

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