Mumbai: India’s economy is likely to expand faster than the Reserve Bank of India’s (RBI) estimate, while the policy rate cutting cycle is likely near its end, economists at Morgan Stanley said in a note after the monetary policy review.
At its first quarter policy review on Tuesday, the RBI left its short-term lending rate steady at 4.75% and the reverse repo rate at 3.25%.
The investment bank expects the domestic economy to grow 6.5% in the current financial year ending March 2010, above the RBI’s upwardly revised 6% with an upward bias.
“We believe that higher than expected industry sector growth will offset the negative impact of lower agriculture output due to poor monsoons,” Chetan Ahya and Tanvee Gupta, economists at the bank wrote.
“Moreover, with the rainfall and overall crop area under cultivation trend improving at the margin, the risk of a major downgrade revision to our agriculture growth forecasts has reduced,” they added.
Morgan Stanley expects wholesale price inflation to rise to 6% by end-March, above the central bank’s estimate of 5% while industrial production is seen rising by 7-8% by the fiscal year-end.
“We expect the WPI to decline on a YoY basis during July-September 2009, on a high base effect and slow domestic demand, before rising to about 6% by end-March 2010 (compared with RBI’s estimate of 5%,” the note said.
The central bank said the liquidity in the system needs to come back to normal levels and it would continue with its accommodative policy stance, until there were more robust signs of economic revival.”
“We believe that the RBI will start hiking policy rates from February-March 2010 onwards,” Ahya and Gupta wrote.
“If global commodity prices rise significantly and excess liquidity balance remains high at current levels in the interim period, we believe the RBI could choose to increase cash reserve ratio and or start issuing market stabilization scheme (MSS) bonds to manage inflation expectations,” they added.