Morgan Stanley Cuts India’s FY25 Growth Forecast to 6.7%

Morgan Stanley has revised India’s FY25 growth forecast from 7% to 6.7% due to weaker-than-expected economic data from Q2, with the economy now projected to grow at a slower 6.3%. Despite this downgrade, the firm remains optimistic about a recovery in the latter half of FY25, anticipating growth to rebound to around 6.7-6.8%, driven by agricultural output and government spending.

Key Drivers of Change

Weak Q2 Data: The downgrade is primarily due to slower-than-expected growth in Q2, with the economy now expected to expand by just 6.3%.

Recovery in H2 FY25: A stronger recovery is expected in the second half of FY25, supported by better agricultural output and higher government expenditure, which is expected to boost economic growth.

Government Spending: A decline in government cash balances in October and November signals a likely increase in spending, which is expected to help drive the recovery.

Mixed Consumer Activity: Vehicle registration data reveals a mixed picture, with lower passenger vehicle sales and increased two-wheeler sales. However, post-festive credit card usage indicates growing consumer confidence.

Inflation and Future Projections

Inflation Easing: Morgan Stanley forecasts a decline in inflation to 4.3% by FY26, down from 4.9% in FY25, primarily driven by stable commodity prices and effective monetary policies. However, food price management continues to be a key challenge, and core inflation may see slight increases.

Monetary Policy: The Reserve Bank of India (RBI) is expected to implement rate cuts in April 2025 as inflation moderates, aiding economic recovery.

Long-Term Outlook

Steady FY26 and FY27 Projections: Morgan Stanley maintains its growth forecast of 6.5% for FY26 and FY27, with domestic demand continuing to play a crucial role in India’s economic performance.

Global Context

In a broader context, Morgan Stanley has also downgraded its outlook for China, reflecting growing headwinds for emerging markets, and anticipates challenges for corporate earnings globally in the near future.

Summery o the news

Why in News	Key Points
Morgan Stanley Revises India’s FY25 Growth Forecast	– Revised India’s FY25 growth forecast from 7% to 6.7%. – Downgrade due to weaker-than-expected Q2 data, with Q2 growth projected at 6.3%. – Recovery expected in the second half of FY25, with growth rebounding to 6.7-6.8%. – Key drivers: agricultural output and government spending.
Inflation Forecast	– Projected inflation for FY25: 4.9%. – Projected inflation for FY26: 4.3%. – Inflation management challenge: Food prices.
Monetary Policy	– RBI expected to cut rates in April 2025 in response to moderating inflation.
Key Indicators	– Government cash balances declined in October-November, signaling likely increase in government spending. – Mixed consumer activity: Passenger vehicle sales down, two-wheeler sales up.
Long-Term Projections	– FY26 and FY27 growth forecast: 6.5%. – Domestic demand remains a key driver for economic growth.
Global Context	– Morgan Stanley downgraded China to “underweight” in emerging markets. – Headwinds expected for corporate earnings and market valuation.