WWRR Vol.2.015

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Macro Stability Expected to Remain in Check Mild acceleration forecasted in inflation: Retail inflation has thus far surprised on the downside mainly due to subdued food prices. While we take into account the upside from factors such as higher minimum support prices, increase in retail fuel prices, and currency depreciation, inflation trajectory is expected to remain benign. Moreover, key drivers of inflation – the trends in both rural wage growth and fiscal deficit – remain in check, further reducing inflationary pressures. Indeed, we expect CPI inflation to remain well within RBI’s target range at 4.3% in F2020 and 4.6% in F2021 from 3.9% in F2019e. Current account to likely narrow a tad in 2019: Given the trailing higher oil prices and improvement in domestic demand, we expect the current account deficit to widen to 2.5% in 2018 from 1.5% in 2017. However, in 2019 we estimate a modest narrowing in the CAD to 2.3% of GDP as oil prices (as per futures curves) remain largely range bound. However, as long as India runs a current account deficit, it will remain exposed to external funding risks – although the degree of vulnerability remains lower. Exhibit 13: Inflation to Stay Within Comfort Zone Exhibit 14: Inflation Expectations of Households Remained Elevated 13% 11% Headline CPI Inflation, YoY(%) MSe 16 14 3 Month Ahead One Year Ahead RBI - Household Inflation Expectation Survey 9% 12 7% Targeted CPI= 8% Targeted CPI=6% Targeted CPI=4% 5% 3% 1% Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Source: CEIC, Morgan Stanley Research Estimates 10 8 6 4 Sep-08 Sep-10 Sep-12 Sep-14 Sep-16 Sep-18 Source: RBI, Haver, Morgan Stanley Research 7
Exhibit 15: Saving Less Investment = Current Account Deficit Exhibit 16: Lower Oil Prices to Help Narrow Current Account Deficit 45% 40% 35% 30% 25% 20% Savings (% of GDP) Investment (% GDP) Current Account Balance (% of GDP), (RS) MSe F1995 F1996 F1997 F1998 F1999 F2000 F2001 F2002 F2003 F2004 F2005 F2006 F2007 F2008 F2009 F2010 F2011 F2012 F2013 F2014 F2015 F2016 F2017 F2018E F2019E F2020E 3% 2% 1% 0% -1% -2% -3% -4% -5% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% F2005 F2006 F2007 F2008 Current Account Balance (% GDP) Current Account Balance Ex Oil (% GDP) F2009 F2010 F2011 F2012 F2013 F2014 F2015 F2016 F2017 F2018 F2019E F2020E Source: CEIC, Morgan Stanley Research E = Morgan Stanley Research Estimates Note: Current account balance for F2018 is actual. Source: CEIC, Morgan Stanley Research, E-Morgan Stanley Research Estimates Trend in oil prices is a key risk to macro stability: Global crude oil prices have remained volatile this year, as oil prices dropped swiftly to near US$62/bbl in November from the peak of US$86/bbl in October. The trend in oil prices affects macro stability given India imports ~80% of the oil it consumes. Higher oil prices expose India to a widening deficit and higher inflation. An increase in oil prices as a result of stronger global growth conditions is a more manageable scenario as it provides an offset of higher export income compared to a supply shock-driven rise in prices. However, we reckon that policy measures in place – such as dismantling of subsidies on the sale of petrol/diesel, higher real rates that reduce funding pressure, and an improvement in the overall funding mix with higher FDI – imply that India is in a better position to manage the headwind of higher oil prices. Exhibit 17: Trend in Net Oil imports vs. Brent Exhibit 18: Sensitivity of Macro Variables to Higher Oil Prices 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% Net Oil Imports (12M Trailing Sum, % of GDP) Brent($/bbl), RS 140 120 100 80 60 40 20 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Source: CEIC, Bloomberg, Morgan Stanley Research Source: RBI, Morgan Stanley Research Estimates. *Total subsidy (which can be shared between government and oil companies). 8
Page 1 and 2: 07 th December 2018 What We Are Rea
Page 3 and 4: Prudent Policy Mix Is the Anchor of
Page 5 and 6: Steady Growth Expected in F2020 We
Page 7: Exhibit 9: Cyclical Component of In
Page 11 and 12: Risks: Skewed to the Downside, Main
Page 13 and 14: 2019 Global Economic and Market Out
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Agri-inputs / Automobiles India UDA
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12/5/2018 From India to US Election
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