Morgan Stanley cuts India's 2009/10 GDP forecast – Reuters

Wed, Dec 10 03:14 PM

Morgan Stanley on Wednesday cut its forecast for India's economic growth in the fiscal year beginning April 2009 to 5.3 percent from 5.7 percent, citing a higher cost of capital which could crimp domestic demand.
It expects the economy to grow 7 percent in this fiscal year, compared with 9.0 percent last year.
"Dislocation in global capital markets has resulted in a sharp reversal in capital inflows, pushing up cost of capital," Morgan Stanley said in a note.
With the domestic banking system already witnessing tight liquidity conditions, foreign exchange outflows at the same time have resulted in a disruptive spike in the cost of capital, it explained.
Over the last few years, India's gross domestic product accelerated higher than its potential growth, helped by large capital inflows, the note said.
Morgan Stanley said recent central bank measures are unlikely to reduce the cost of capital in a meaningful manner before domestic demand and underlying credit demand decelerate sharply.
Morgan Stanley expects the central bank to cut its key lending rate by 125 basis points to 5.25 percent by the end of 2009, along with additional measures to support liquidity.
It expects much of the cut by March 2009, by which time it expects the repo rate at 5.5 percent.
But it does not see any scope for an aggressive fiscal policy response from the government given its large fiscal deficit and high public debt.
The central bank on Saturday slashed its key interest rates by 1 percentage point in order to boost growth and shore up investor confidence amid signs of an economic slowdown.