Mumbai: Morgan Stanley raised India’s FY10 growth forecast to 6.4% on a higher-than-expected August industrial output and said if the data continue to surprise on the upside policy rates could be lifted before end-2009.
Morgan Stanley had previously forecast growth of 5.8% and expected policy rates to be lifted by January 2010.
“However, we believe a rate hike would be unlikely to derail the recovery, as we see a potential increase as a move towards normalisation rather than tightening that would hurt growth,” economists Chetan Ahya and Tanvee Gupta wrote in an Oct. 14 note.
Morgan Stanley expects the Reserve Bank of India (RBI) to hold rates at its 27 October quarterly monetary policy review, but sees a “more than even” chance of a hike in banks’ cash reserve ratio as a tool to sterilize rising capital inflows.
Industrial production rose 10.4% in August from a year earlier, its fastest pace in 22 months, beating the median forecast in a Reuters poll, and July’s annual growth was revised up to 7.2% from 6.8%.
Morgan Stanley also lifted its industrial production growth forecast for India to an average 8% year-on-year in fiscal year 2009-10 from 6.4% earlier, and its services sector growth view to 8.4% from 8.1%.
It sees 8% economic growth in fiscal year 2010-11. On a calendar year basis, it expects India to grow 5.9% in 2009 and 7.9% in 2010.
Morgan Stanley attributed the “strong recovery in growth” to aggressive fiscal policy and loose monetary policy.
The RBI has slashed its key interest rate by 425 basis points between October 2008 and April and the government cut import and factory gate duties and boosted spending to shield India from the worst of the global downturn.
The RBI governor, Duvvuri Subbarao, has said there was broad agreement India needed to step back from its easy policy stance, but he did not set a timeframe.