Inflation To Fall To Within RBI's Target Range By March 2023: Report

Morgan Stanley expects India's retail inflation to track within the Reserve Bank of India's target band by March 2023.

"We expect inflation to moderate in FY24 as the effect of higher commodity prices wears off in YoY terms and supply chains continue to normalize. Further, as we expect a rise in capex in FY24, we expect this higher capacity to help cap further rise in core inflation pressures in FY25," the multinational investment firm said in a report titled '2023 India Economics Outlook: Sustaining Domestic Demand Strength' authored by economists Upasana Chachra and Bani Gambhir.

The report said it expects India's retail inflation to moderate to 5.4 per cent in 2023-24 and to 4.8 per cent in 2024-25 from 6.6 per cent in the current financial year 2022-23.

India's retail inflation surged to 7.41 per cent in September, remaining above the mandated range of 2-6 per cent for the third consecutive quarter. Data for October is expected later this evening.

Under the flexible inflation targeting framework introduced in 2016, the RBI is deemed to have failed in managing price rises if the CPI-based inflation is outside the 2-6 per cent range for three quarters in a row.

An out-of-turn meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India was held on November 3 to discuss and draft the report to be sent to the central government for having failed in maintaining the inflation mandate. Further details about the meeting are yet to be in the public domain.

In this context, Morgan Stanley expects the RBI to increase key interest rates until February 2023, taking the terminal repo rate to 6.5 per cent. Currently, the repo rate is at 5.9 per cent.

"Thereafter, we expect a pause. We expect policymakers to focus on maintaining macro stability, which would also help provide a durable basis for growth recovery. As inflation dynamics improve, we expect a shallow rate cut cycle of 50 basis points, with cuts of 25 basis points in both 4Q23and 1Q24. We expect real rates to be around 100 basis points through the cycle."

Further, on gross domestic product (GDP) growth, Morgan Stanley expects domestic demand strength to be the key driver of India's growth trajectory amid various global headwinds.

"Indeed, domestic demand indicators continue to exhibit broad-based recovery as the economy benefits from the full impact of the reopening vibrancy, the government's supply-side focused policy measures filter through to reinvigorate capex, and fundamentally stronger balance sheet positions of private sector help to improve risk appetite," it said.

However, a prolonged slowdown in global growth or recession, higher commodity prices, and potential risk aversion in international capital markets, the report said, expose India to downside risks.

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