India, Korea may be first to lift rates: Morgan Stanley

MUMBAI: Broking house Morgan Stanley expects India and Korea to start lifting policy rates from January 2010, and expects most countries in Asia, except China, to reverse their fiscal stimulus soon.

“We believe the policy rate decision will depend on the trend in industrial production and inflation outlook. By January 2010, the industrial production growth should have been in the range of 8-10% for over six months, indicating that the recovery is more sustainable,” said a Morgan Stanley report in its outlook for interest rates in India.

“Moreover, we expect industrial production growth to be sustained at 8% plus growth, with non-food WPI inflation to average 4.5% in 2010, implying that the Reserve Bank of India (RBI) would likely hike policy rates by 150 basis points,” the note added.

The broking house expects the withdrawal of the policy support in Asia overall to be gradual. “We cite three reasons: recovery so far been largely policy-induced and quick reversal in stimulus would risk a double-dip in growth; although exports are recovering, they are still far away from pre-crisis levels; and AXJ (Asia excluding Japan) core inflation remains low below central banks’ comfort zone,” the Morgan Stanley report said. Morgan Stanley expects China’s fiscal deficit to widen.



“We expect People’s Bank of China to hike the base interest rate early 3Q10, when CPI inflation expects to have exceeded 3% year-on-year (YoY). In view of the current de facto peg of renminbi against the US dollar, the timing of China’s rate hike will also hinge on that of the US Federal Reserve, in our view. In particular, we don’t expect People’s Bank of China to hike interest rate before the US Fed does,” the Morgan
Stanley note said.