India's GDP growth aim for FY25 further slashed to 6.3% by Morgan Stanley

Morgan Stanley has again cut its GDP growth projection for India to 6.3 per cent for this fiscal year, down from its earlier estimate of 6.7 per cent. This come days after India's GDP slowed to a seven quarter low in the July-September quarter. Morgan Stanley had cut India's growth target for FY25 to 6.7% earlier in November and ahead of the Q2 GDP data.

India’s GDP growth slowed to 5.4 per cent year-on-year (YoY) in the July-September quarter of 2024, marking its lowest level since March 2023. This was below the 6.7 per cent growth seen in the previous quarter and also fell short of Morgan Stanley’s forecast of 6.3 per cent, as well as the consensus estimate of 6.5 per cent.

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The slowdown was evident across private consumption and capital expenditure (capex), although private consumption outpaced capex, growing by 6 per cent compared to 5.4 per cent. While the services sector showed resilience, expanding at 7.1 per cent, the industry sector trailed with a 3.9 per cent increase, with manufacturing and electricity being key drags.

Despite this moderation, Morgan Stanley maintains an optimistic view for the second half of FY25, projecting a rebound in growth. The report pointed out positive trends in October and November, driven by a strong festive and wedding season, forecasting GDP growth to average 6.6 per cent in the latter half of FY25.

The investment bank attributes the anticipated recovery to increased government spending, improved rural demand, and easing financial conditions. These factors, it argues, will help counter the recent slowdown and drive growth momentum in the months ahead. High-frequency indicators from October and November reflect an increase in economic activity, suggesting the July-September quarter marked the lowest point of the slowdown.

On the monetary policy front, Morgan Stanley expects the Reserve Bank of India (RBI) to keep interest rates unchanged during its policy review on December 6. Inflation, which remains above 6 per cent, is expected to ease to between 5-5.5 per cent over the next two months. However, tight liquidity in the banking system could lead the RBI to implement liquidity-enhancing measures, such as open market operations (OMO) purchases. The weighted average call rate has recently increased to 6.7 per cent due to interbank liquidity deficits.

Morgan Stanley highlighted three key factors for sustained economic recovery. First, government spending trends, particularly revenue and capital expenditure, and cash balances held with the RBI, need to be monitored closely. Second, agricultural performance, including kharif production and rabi sowing, will influence food price volatility and rural demand. Finally, domestic liquidity and financial conditions are crucial, as they affect overall economic activity.