New Delhi: India’s economic recovery is expected to pick up pace from the April-June quarter on account of consumption demand revival amid waning demonetisation impact, says a Morgan Stanley report. According to the global financial services major, improvement in external demand is a key driver of growth at this juncture as domestic demand trends are still “mixed". “...while external demand is critical in the growth outlook, we expect that recovery in consumption from the second quarter of 2017 should provide an added support to overall growth trajectory," Morgan Stanley said in a research note.

The consumption recovery should take hold from the second quarter of this year as the impact of currency replacement program wanes and demand finds support from higher purchasing power due to benign inflation, lower cost of borrowing and pick-up in job growth, it said.

External demand is expected to stay supportive this year as demand conditions in both emerging market as well as developed market is accelerating, the report said.

Moreover, improvement in external demand will likely create positive spillovers for domestic demand recovery, as it tends to influence trends in industrial production and corporate sales growth, it added.

On RBI’s monetary policy stance, the report said more liquidity management measures are likely in the offing and the central bank might go for a rate hike in the second half of 2018.

“As the fiscal year progresses, we think the RBI will gradually shift its tone towards a hawkish one, eventually paving the way for a rate hike in the second half of calendar year 2018...," it said.

Last month, the Reserve Bank had left key policy rate unchanged at 6.25% for the third review in a row citing upside risks to inflation. It had, however, increased the reverse repo rate—which it pays to banks for parking funds with it—by 0.25% to 6%, narrowing the policy rate corridor.