Morgan Stanley lowers India's growth aim for FY25; economy may expect a better Q3 show with wedding season

Morgan Stanley on Monday lowered India's growth forecast for FY25 from 7 per cent to 6.7 per cent, on the back of weaker-than-expected high-frequency growth data for the second quarter, which is anticipated to grow at a slower pace of 6.3 per cent.

However, Morgan Stanley projected that growth may rebound to approximately 6.7-6.8 per cent in the second half of FY25, driven by improved agricultural output and increased government spending.

"Post the October data, more data points related to November are available which point to a likely trend of continued recovery. Government cash balance trend showed a drop in October and early November, which will likely lead to a pickup in spending, while vehicle registration data for November is showing a mixed trend with PV sales lower and TW sales rising on a YoY basis," the report said.


"Further, credit card spending has improved comparing post festive spending this year vs previous year. We believe that a pickup in government spending and the start of the wedding season (higher number of auspicious days on a YoY basis) will help lift demand in QE Dec," it added.

Furthermore, the financial services company also maintained its forecast for FY26 and FY27 at a steady 6.5 per cent, noting that domestic demand will remain a key growth driver in the coming years.

Inflation is projected to moderate to 4.3 per cent in FY26, lower than 4.9 per cent in FY25, attributed to prudent monetary policy and stable commodity prices.

Morgan Stanley also expects the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) to implement rate cuts in its April meeting, viewing moderation in inflation.

The report further indicated that the primary inflation challenge over the past two years has been managing food prices. However, it forecasts a moderation in inflation measures excluding food, suggesting a potential easing of overall inflationary pressures.

Looking ahead, the financial services firm points to improved rainfall as a positive sign for crop yields, which could contribute to a decrease in food inflation. Despite this optimistic outlook, the report cautions that risks associated with sudden volatility in food prices remain a concern.

Morgan Stanley anticipates that food prices will moderate over the next 12 months, supported by favorable supply-side conditions. However, they also predict a slight uptick in core inflation, indicating that while food prices may stabilize, other inflationary pressures could emerge.

"However, we remain watchful of upside risks emanating from changes in food prices, disruption in global trade and or currency depreciation risks," the report said.