India's domestic demand to sustain growth

Mumbai, July 25

Domestic demand will help sustain India's growth momentum as high-frequency data for June remained strong, with gains concentrated in services-led consumption, whilst data for industrial activity exhibited a mixed trend and external demand moderated further, Morgan Stanley said.

Early trends for July indicate data holding across sectors with mobility (ex-residential) fairly steady and unemployment levels lower than in the previous month. Credit growth continues to rise -- it has reached its highest level since April 2019.

CPI remained stable at 7 per cent YoY in June, similar to May's levels, in line with our estimate. Global commodity prices have moderated and high-frequency food prices have increased at a softer-than-expected pace. The moderation in commodity prices has brought a respite to rising WPI inflation, which moderated a tad in June, to 15.2 per cent YoY, with monthly sequential rise being the slowest in six months.

Trade deficit made another high but is likely to moderate gradually: The trade deficit widened to an all-time high of US$25.6 billion in June, averaging US$20.7 billion in CYTD2022. On a three-month annualised basis, the trade deficit has widened to 8.7 per cent of GDP, while the trade deficit ex oil is tracking at 4.3 pr cent of GDP in June, Morgan Stanley said.

Global growth is expected to slow to 1.5 per cent YoY in QE December 2022 from 4.7 per cent in QE December 2021. "We see three channels of transmission: 1) slower trade growth, 2) tighter financial conditions, and 3) changes in commodity prices. We thus lower our expectations of export growth, which is already showing some signs of moderation, with some follow-through to domestic capex demand, given the correlation between exports and capex," Morgan Stanley said.