Predicting an average sub-5 per cent inflation this year, Morgan Stanely has said India is in for a long period of higher sustainable growth and lower prices. "We are more constructive on inflation outlook and we expect the retail price index to decelerate to 4.75 per cent by this December against the consensus estimate of 5.8 per cent. We also expect growth momentum to pick up, but do not expect a rise in inflationary pressure," says Chetan Ahya of Morgan Stanley in a note.
He also notes that rural wage growth has come down to a nine-year low of 5.5 per cent in January this year from a steep 20 per cent in FY 2013. Morgan Stanley draws optimism from a slew of favourable factors, which influence retail inflation trend, such as wage growth, fiscal policy, growth-mix, real interest rates and global commodity prices. The last time inflation and growth moved in tandem was 2003-05, paving the way for near double digit growth before recession played spoilsport.
"Comparing the drivers of inflation between the two cycles we see that domestic factors are moving along similar lines as in the 2003-05 cycle and decline in global commodity prices are an added support in the current cycle," Ahya said. Stating that sustained inflation deceleration will provide more room for more monetary easing, he forecast a sustainability lower inflation path of 5 per cent to be achieved from April, and expects inflation to decelerate to 4.75 per cent by December this year.
"Based on our expectation of the inflation trajectory, we believe the Reserve Bank could lower rates by a further 75-100 bps in 2015. Also we believe deposit rates are to decline significantly and more than policy rates." Comparing the current inflation-growth cycle to the 2003-05 cycle and citing the present domestic and external macro environments, Ahya said, "like in the current period, the economy was in the early stage of recovery between 2003 and 2005. In the previous cycle acceleration in growth was accompanied by significant improvement in productivity which kept inflation low and stable."