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India’s inflation has likely peaked as global commodity prices moderate: Morgan Stanley Research

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Consumer price inflation in June remained little changed at 7.01% from 7.04% in the previous month. (Photo: Reuters)

BENGALURU: India’s domestic demand remains stronger than external demand and inflation has likely peaked as global commodity prices moderate, Morgan Stanley Research said on Tuesday.

It said high-frequency data for June showed that demand for services-led consumption was strong, industrial activity exhibited a mixed trend and external demand moderated further.

It also said that early trends for July indicate data holding across sectors with mobility (ex-residential) fairly, steady and unemployment levels lower than in the previous month.

“Credit growth continues to rise – it has reached its highest level since April 2019,” said Morgan Stanley Research in its ‘India Economics – Macro Indicators Chartbook.’

It added that the worst of macro stability was likely over as commodity prices moderate.

“Global commodity prices have moderated and high-frequency food prices have increased at a softer-than expected pace. Moderation in commodity price hikes is expected to bring some respite to macro stability indicators. Building in the moderation in commodity prices and swifter correction in domestic food prices, we see the near-term inflation trajectory improving,” it said.

It expects inflation based on Consumer Price Index to average 6.5% in the current financial year ending March 2023. “However, we do not expect much change in inflation beyond FY23, and expect it to average 5.3% in FY24. Near-term risks to the inflation trajectory stem from changes in commodity prices and/or domestic food prices,” it said.

Morgan Stanley Research expects monetary policy normalisation to continue, with a terminal repo rate of 6.5% to be reached by April 2023. “We believe that normalization in real rates will help preserve macro stability and provide a basis for a durable growth recovery,” it added.

It added that while trade deficit touched another high in June, it is likely to moderate gradually.

India’s trade deficit widened to an all-time high of $25.6 billion in June.

It pointed out that slower global growth was leading to downside risks to growth trajectory. “Our global economics team expects global growth to slow to 1.5% YoY in December 2022 … We see three channels of transmission- slower trade growth, tighter financial conditions, changes in commodity prices. We thus lower our expectations of export growth, which is already showing some signs of moderation, with some follow-through to domestic capex demand, given the correlation between exports and capex,” it said.

However, domestic demand would provide a partial offset. “We expect support from the government’s supply-side response and the reopening vibrancy to partially counter the downside,” the report said.

The government’s policy reforms and expansion of public infrastructure spending alongside a trend of supply chain diversification should provide support to private capex, it added. It expects GDP growth at 7.2% in FY23 and 6.4% in FY24.

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