Why Morgan Stanley feels the worst of macro instability is over

Is the worst period of financial instability over for India? Well, at least that is what experts at financial services firm Morgan Stanley feel.

The global financial services firm has said in a note that in the coming months, both retail inflation as well as India’s trade deficit are likely to moderate, although that will happen slowly.

What exactly has Morgan Stanley said?

In a note on Wednesday, Upasana Chachra, chief India economist at Morgan Stanley, said that global commodity prices were largely steady in July, with the exception of oil prices, which continued to decline.

Chachra said, "We believe the worst of macro instability is behind us now, though moderation in inflation and narrowing of India's trade deficit will be gradual."

Morgan Stanley further said that the indexes measuring global commodity prices, food prices and metal prices had stabilised this month and were down 9%-25% from their peak.

What is Morgan Stanley’s view on oil prices?

Oil prices have declined 8% month-on-month.

These fuel-related global commodities constitute 13.2% of India's CPI (consumer price index) and 33.8% of the WPI (wholesale price index) basket," Chachra added. The rupee had also been relatively stable this month, Chachra said.

What does the US-based firm have to say on inflation?

Chachra of Morgan Stanley thinks that the country's retail inflation rate will increase to 7%-7.2% in August and remain at 7% in September before moderating gradually.

The inflation rate has remained well above the Reserve Bank of India's tolerance band for seven consecutive months.

At what level of inflation does the government want the country’s prices to rise?

The government has mandated the central bank to maintain retail inflation at 4% with a margin of 2% on either side for a five-year period ending March 2026.

What does Morgan Stanley have to say on India’s trade deficit?

Morgan Stanley thinks the nation's trade deficit likely peaked at $30 billion in July. The record trade deficit has prompted economists to revise India's current account deficit and balance of payments projections.

"We believe that lower commodity prices and a partial roll back of taxes on petroleum products will help improve the trade balance trend," Chachra pointed out.

Where is inflation at right now?

India’s consumer inflation eased to a 5-month low of 6.71% in the month of July, down from 7.01% in June. Also, the factory output, measured through the Index of Industrial Production (IIP), recorded a growth of 12.3% in June, two separate data released by the Ministry of Statistics & Programme Implementation (MoSPI) showed.

The consumer inflation data is mainly factored in by the central bank while making its bi-monthly monetary policy. In a bid to check the raging inflation, the Monetary Policy Committee (MPC) of the RBI last week hiked the repo rate by 50 basis points to 5.40%.