‘Current account deficit likely to hit 10-year high’

Morgan Stanley has reduce India’s GDP development estimate by 50 foundation factors to 7.9 per cent and raised the retail (CPI) inflation forecast to six per cent.

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It additionally expects the present account deficit to widen to a 10-year excessive of three per cent of GDP in FY23. “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 the government,” Morgan Stanley mentioned in a report.

ExplainedKey fear: Inflation

The key channel of influence for the financial system can be increased cost-push inflation, feeding into broader value pressures, which can weigh on all financial brokers – households, enterprise and the federal government.

The threat would stem from an additional sustained rise in oil costs, resulting in fast deterioration in macro stability and foreign money volatility, Morgan Stanley mentioned. In the wake of continued geopolitical tensions, the surge in oil costs is prone to be sustained, which might result in deterioration within the present account deficit from the next oil import invoice. “Our sensitivity analysis shows that a 10 per cent rise in oil prices would widen India’s current account deficit by 30-35 bps of GDP,” it mentioned.

“Further, we expect the balance of payments to be in deficit of approximately 0.5-1 per cent of GDP because capital flows are likely to be lower than the current account deficit,” it mentioned. The extent of vulnerability to funding dangers can be cushioned by the big foreign exchange reserves, which together with ahead ebook stand at $681 billion.

Morgan Stanley expects the April coverage to mark the method of coverage normalisation with a reverse repo price hike. However, if the RBI have been to delay its normalization course of, the chance of disruptive coverage price hikes would rise. “We see less room for fiscal policy stimulus to support growth given high deficit and debt levels – we see a possibility of a modest fuel tax cut and reliance on the national rural employment program as an automatic stabiliser,” it mentioned.