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Informist, Tuesday, Apr. 7, 2026

 

MUMBAI – Morgan Stanley sees growth slowing down and inflation rising in India because of the extended war in West Asia and higher energy prices. Economists at the bank also project higher WPI inflation, and wider current account and fiscal deficits, they said in a report.

 

Morgan Stanley lowered its forecast for India's GDP growth in 2026-27 (Apr-Mar) by 30 basis points to 6.2%, while CPI inflation is seen rising to 5.1% this year, 110 bps higher than previously projected. The bank has projected FY28 GDP growth at 6.9%. India's GDP grew 7.8% in the December quarter, based on the new GDP series. The government's second advance estimate has projected FY26 GDP growth at 7.6%. 

 

"The extended geopolitical conflict, leading to elevated energy costs, supply-side constraints and stress on external balances, imply a downside to India's macro outlook," Morgan Stanley said. "We assume crude averages US$95/bbl in F2027, with gas availability an additional constraint; elevated prices and curtailed industrial supply are raising input costs, forcing selective production cuts and adding to imported inflation amid INR weakness," the report said.

 

Growth is seen falling to 5.9% in the June quarter, Morgan Stanley said, as industrial activity softens, margins compress, and external financing tightens. Macroeconomic stability may also weaken as inflation pressures turn broad-based, the report said. 

 

The bank sees CPI inflation rising to 5.1% in FY27 from around 2% in FY26 because of higher production costs and currency weakness. Morgan Stanley projects WPI inflation jumping to 7% in FY27 because of the impact of the war from less than 1% in FY26. "Risks are skewed up, especially if crude stays above US$110/bbl – potentially forcing retail fuel price hikes and potentially raising second-round inflationary impact," Morgan Stanley said. 

 

Higher crude oil prices could also widen the current account deficit by nearly 150 bps to around 2.5% of GDP in FY27, Morgan Stanley said. This would be much higher than the bank's previous projection of a current account deficit of 1% of GDP for FY27. "With capital inflows lagging financing needs in recent years, we expect the balance of payments to remain in deficit for a third year, increasing vulnerability to INR pressure," Morgan Stanley said. 
 

If crude oil prices jump to $150 a bbl for a quarter, the "hit to growth and macro stability would be non-linear," Morgan Stanley said. In this case, the bank sees India's GDP growth falling to 5.7% in FY27, and CPI inflation rising above the Reserve Bank of India's tolerance range of 6%. The current account deficit in this case would widen to around 3% of GDP.

 

Morgan Stanley expects fiscal measures by the government to smoothen the supply shock from the US-Israel war on Iran. Higher fertiliser subsidy and lower tax collections could push the government's fiscal deficit to around 4.6-4.8% of GDP this year, higher than the Budget target of 4.3% of GDP for FY27.

 

The RBI's Monetary Policy Committee is likely to hold the repo rate at 5.25%, but risks are asymmetric. "We anticipate the initial policy response leveraging non-rate tools, such as managing OMC (oil marketing company) dollar demand, potentially tightening ODI (overseas direct investment) outflows and boosting NRI (non-residents Indians) deposits," economists at the bank said. "We see risks of rate hikes, if these measures fail to stabilise the INR amid persistently high oil prices."  End

 

US$1 = INR 92.92

 

Reported by Shubham Rana

Edited by Vandana Hingorani

 

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