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Context:
Morgan Stanley has downgraded India’s growth forecast for 2025-26 by 40 basis points to 6.1%, attributing the revision to changes in trade and tariff policies. The financial services firm also reduced its growth estimate for 2026-27 to 6.3%, down from an earlier projection of 6.5%.
Key Factors Influencing the Downward Revision
- Impact of Trade Policies: The revision reflects uncertainty caused by changes in global trade and tariff policies, which are expected to dampen external demand and business sentiment, thereby affecting the capex cycle.
- Growth Trough in December 2025: Growth is projected to trough in the December 2025 quarter at 5.7%, compared to 6.2% in the same period the previous year.
Inflation Outlook
- Moderate Inflation Forecast: Despite the slower growth, Morgan Stanley expects inflation in India to remain benign, with an average of 4% for the current financial year.
- Factors Keeping Inflation in Check: Lower food prices and reduced oil prices are expected to keep both food and non-food inflation at manageable levels.
Implications for Monetary Policy
- Rate Cuts Expected: Given the lower inflation and slower growth, Morgan Stanley anticipates that the Reserve Bank of India (RBI) will likely implement a cumulative 100 basis points rate cut in 2025, with two more interest rate cuts expected.
- Deeper Downturn Risks: A more pronounced economic downturn could lead to additional easing by the RBI and potentially a pause in fiscal deficit consolidation for F2026.
Risks and Uncertainty
- Downside Risks: The growth outlook is skewed to the downside, primarily driven by the potential for a deeper slowdown in global growth.
- External Volatility: Risks from global capital flows and currency volatility could complicate efforts by policymakers to manage growth risks.
- Trade Policy Resolution: The growth trajectory could improve if uncertainties surrounding tariff policies are resolved, particularly if the US and China strike a timely trade deal.
Morgan Stanley’s revised forecast indicates that India’s growth will face significant challenges in the near term, influenced by external trade factors and global economic uncertainties. However, with moderating inflation and potential policy easing by the RBI, India’s economic environment may stabilize, offering an opportunity for recovery in the medium term.
