The worst period of macro instability is possibly over for India, and both retail inflation, which is measured by the Consumer Price Index (CPI), and trade deficit is expected to moderate albeit gradually, according to financial services firm Morgan Stanley.
“Global commodity prices were largely steady last month, with the exception of oil prices which continued to decline… We believe the worst of macro instability is behind us now, though moderation in inflation and narrowing of India’s trade deficit will be gradual,” said Upasana Chachra, chief India economist at Morgan Stanley, in the note on Wednesday.
India’s retail inflation dropped below the 7 percent mark for the first time since April, easing to 6.71 percent in July, helped by a moderation in food prices.
India’s exports grew marginally by 2.14 per cent to USD 36.27 billion in July, while the trade deficit almost surged three-folds to USD 30 billion during the month, official data released last week showed.
The Morgan Stanley note pointed out that the indexes measuring global commodity prices, food prices and metal prices had stabilised in August and were down 9-25 percent from their peak. Oil prices, meanwhile, had declined 8 percent month-on-month.
“These fuel-related global commodities constitute 13.2 percent of India’s CPI (consumer price index) and 33.8 percent of the WPI (wholesale price index) basket,” Chachra said.
The rupee had also been relatively stable in August, she said.
India’s consumer inflation rate will rise to 7-7.2 percent in August and remain at 7 percent in September before moderating gradually, according to her. The inflation rate has remained above the Reserve Bank of India’s tolerance band for seven straight months.
The research house reckons India’s trade deficit likely peaked at $30 billion in July. The record trade deficit has prompted economists to revise India’s current account deficit and balance of payments projections.
“We believe that lower commodity prices and a partial roll back of taxes on petroleum products will help improve the trade balance trend,” Chachra said.
