India 'Up And Away' — Morgan Stanley Backs Modi-Government's Q3 Turnaround Outlook

India's growth momentum for the upcoming March quarter is "up and away', says Morgan Stanley, as they expect "robust growth signals" in the months ahead.

Heightened capital market activity and a bunch of global developments to decide where share prices head, strategists at Morgan Stanley including Ridham Desai said in a note on Dec. 26.

The brokerage firm expects the acceleration in government spending, expanded wedding season, and a strong summer crop to support near-term growth. The factors that triggered the growth slowdown in the first half was one-off, the note said.

Morgan Stanely expects the sell side is set to be surprised to the upside in the March quarter following major reductions in earnings estimates in recent weeks. "Our top-down estimates are ahead of consensus."

Even, top officials in the Modi government are convinced that the slowdown seen was only a "blip" and temporary.

Finance Minister Nirmala Sitharaman described earlier the lower-than-expected growth in the gross domestic product in the September quarter as a "temporary blip".

Chief Economic Advisor to the Government of India, V. Anantha Nageswaran, also indicated that the Q2 GDP growth estimate may be revised upwards in the coming days. He cautioned against overinterpreting the Q2 numbers, noting that the global uncertainty index had spiked during the period.

India's "large stock market" cannot completely deviate from global equity markets but the correlation of returns with global equities continues to decline, Morgan Stanley said.

Softer global markets could cap absolute returns, the brokerge said adding that a global bull market could coincide with relative underperformance for a low-beta market like India.

A slowdown in global growth could hurt India along with deflation in Chinese export pricing as it will damage India's ability to expand global trade, it said. "While India remains less affected by this than in the past, a rise in the oil price above $110 could present headwinds to the macro."

Morgan Stanley expects a shallow easing cycle of a cumulative 50 basis points. It expects two consecutive rate cuts of 25 basis points each, commencing in February. "More importantly, the RBI is now committed to durable liquidity which should help credit growth."

The positive wealth shock of the past ten years gives equity flows a solid foundation for the coming decade, the brokerage said. "The bunching up in issuances could moderate the domestic bid amidst greater volatility in foreign portfolio flows."