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Rising energy prices can pose risks to Indian economy's growth–inflation dynamics but economists at Morgan Stanley believe that improving demand conditions could provide some offset and reduce macro risks. Drawing parallel from 2003-2007, when oil prices rose 2.5 time, they argued that  growth conditions for Indian economy has improved and macro stability indicators remained within comfort range.

“While near-term risks have emerged due to supply-side shortages  semiconductor chips affecting auto sector, coal shortages affecting power generation),at the margin the situation has been stable, and we expect the impact to be transitory. We expect vaccination rates to reach a critical mass by early next year, which will help in broadening the recovery and external demand conditions remain supportive. As such, better demand conditions (domestic and global) will help provide some offset to higher energy prices," Morgan Stanley economists wrote in a note. 

Morgan Stanley also expects Reserve Bank of India to start normalizing monetary policy with reverse repo hikes in December (of 15-20bp) and February.

“We believe RBI could also take a repo rate hike in February, given growth is expected to improve further. The risks of sharper and disruptive tightening will emerge if inflation remains higher (above 6%) for longer and or faster-than-expected change in global inflation and monetary policy expectations," the economists said. 

Morgan Stanley remains more optimistic than consensus on this year's GDP target for Indian economy. “We expect GDP to move into the positive zone on a two-year CAGR basis from QE-Sep, with the ongoing recovery supported by pent-up demand, external demand and public capex. Further, the improving vaccination trend (average daily vaccination at 7.7mn in September) will help in a broad-based consumption recovery. We therefore remain more optimistic than consensus as we expect GDP growth of 10.5% in F2022 and 7.2% in F2023."

Morgan Stanley however said 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 added. 

Industry body PHDCCI recently said Indian economy is poised to achieve 10.25%nt GDP growth in FY 2021-22 on the back of effective government policies, Reserve Bank's accommodative policy stance and improved business sentiments.

Last week, the RBI retained the GDP (gross domestic product) forecast for the current financial year at 9.5 per cent and flagged global semiconductor shortages, elevated commodity prices and potential global financial market volatility as downside risks to economic growth. 

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