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Business News/ Economy / Rising energy prices expose India to macro risks: Morgan Stanley
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Rising energy prices expose India to macro risks: Morgan Stanley

The risks of sharper and disruptive tightening will emerge if inflation remains higher for longer and or faster-than-expected change in global inflation and monetary policy expectations

Crude oil prices have been surging, putting at risk India's nascent economic recovery. (Photo: Reuters)Premium
Crude oil prices have been surging, putting at risk India's nascent economic recovery. (Photo: Reuters)

MUMBAI: Rising energy prices may pose risks to India's growth prospects, according to Morgan Stanley. However, it believes, that improving demand conditions could provide some offset and reduce macro risks.

In the past few weeks, energy prices have surged, rising in double-digits sequentially. Oil prices are up over 10% so far this month, with crude hovering around $83 per barrel. Global crude oil prices breached the $80/bbl mark in October, rising 63.3% year to date in 2021, with 41% of increase coming since June. Coal prices are up 15% in this month so far at $200 per meter tonne.

"This rise in energy prices, specifically oil, has prompted concerns of higher inflation, slower growth and whether this could lead to disruptive monetary policy tightening. We believe that while there are upside risks to inflation, we expect growth conditions to improve on two-year CAGR basis and policy rates to start normalizing in line with growth recovery," said Morgan Stanley.

Morgan Stanley expects normalisation in monetary policy to start with reverse repo hikes in December (of 15-20 basis points) and February, to normalise the policy rate corridor to pre-pandemic levels.

It believes the Reserve Bank of India (RBI) could also take a repo rate hike in February, given growth is expected to improve. The risks of sharper and disruptive tightening will emerge if inflation remains higher for longer and or faster-than-expected change in global inflation and monetary policy expectations.

Morgan Stanley expects India's gross domestic product (GDP) to grow at10.5% in FY22 and 7.2% in FY23.

"Risks to the growth outlook are balanced and stem from supply-side disruptions lingering for longer, leading to a more meaningful downside in near-term growth, a potential rise in covid-19 cases and/or a slowdown in pace of vaccination. Further, a continued rise in commodity prices, which creates a sharp increase in inflation and need for disruptive tightening, will adversely affect growth," it said.

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Published: 16 Oct 2021, 04:51 PM IST
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