Healthy household balance sheet will boost auto, consumer goods sales: Morgan Stanley

  • A Morgan Stanley report said the pandemic was an exogenous shock and is now fading.
  • It says India’s domestic balance sheet is healthy and a favorable macro backdrop will keep consumer confidence high.
  • This highlights that India is best positioned among its Asian peers to deliver domestic demand alpha.

According to a Morgan Stanley report, India’s domestic balance sheets are healthy and a favorable macro backdrop will keep consumer confidence high.

“The pandemic was an external shock and, as it is now fading, households and corporations are well positioned to start spending again. We believe that the prolonged cyclical slowdown in 2013-19 has led to a reduction in demand especially for housing, consumer durables such as autos and capital goods,” the report said.

Morgan Stanley is optimistic that India’s consumption will pick up in the coming quarters, as the economy has now fully reopened and is supported by job creation and income growth.

“Particularly in the case of consumer durables, we expect the trend growth rate to remain high, as domestic balance sheets are healthy and a favorable macro backdrop will keep consumer confidence high,” it said.

‘RBI does not need to raise rates deeply in restrictive territory’

This confidence comes from cooling crude oil and commodity prices, which are down 23-37% from their all-time highs in March 2022.

Morgan Stanley predicts that this will help India’s macro factors such as inflation and foreign exchange reserves move back towards the comfort zone and India’s central bank may not have to intervene and resort to another rate hike. could.

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“Against this background, we anticipate that there is no need for RBI to lift rates deeply into restrictive territory. In other words, controlling macro stability indicators would not require the RBI to meaningfully slow domestic demand growth,” the report said.

Since May 2022, the RBI has cumulatively increased its repo rate by 140 basis points in quick succession, raising policy rates to 5.4% now, a touch from pre-pandemic levels.

However, analysts at Morgan Stanley believe there is more to come.

“Our forecast is that the RBI will increase interest rates by 6.5%, which, along with our inflation projections, would mean that real rates will turn positive by 4Q22 and move up to 100bps by 2H23, which we feel will address some of the concerns on macro stability. will help reduce the risk,” the report said.

Sunny macro outlook, better than Asian countries

As external risks ease, India’s gross domestic product (GDP) growth is likely to average 7% in the coming months.

“In 2022-23, India will grow at an average rate of 7%, the strongest among the largest economies, contributing 28% and 22% to Asian and global growth,” the report said.

India is best positioned to generate domestic demand alpha and its cyclical recovery will be sustained by structural factors, the report said.

The country’s car sales are up 24% from pre-Covid levels, the strongest in Asia. Two-wheelers are also running strong at 25% above pre-Covid levels. Even the new property sales and launches have hit an 11 and 8 year high respectively.

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“The recovery strength provides a comfortable backdrop and represents the economy’s strongest performance in nearly a decade. What is more, it is the breadth of recovery where we are seeing increased firing on almost all cylinders, which is very encouraging,” the report said.