New Delhi: With the focus back on macroeconomic stability, inflation and trade deficit are expected to improve moderately in January, said US broking house Morgan Stanley on Friday.
It said that retail inflation is expected to moderate to 5 per cent in January (5.2 per cent previously) and that the trade deficit narrowed to $12 billion ($14.9billion previously).
“A sequential decline in high frequency food prices, a drop in gold imports and robust exports growth are the key drivers behind this improvement,” said Morgan Stanley.
However, looking beyond January, Morgan Stanely said it expects inflation to rise to a peak by June (driven by base effects in food inflation and impact of house rent allowance) and that the current account deficit will widen on the back of an uptick in investment.
“Our assessment remains that the starting point of core inflation and current account deficit is providing some buffer, but we do think that moderate risks are emerging on account of the wider-than-targeted fiscal deficits,” it said.
“Our base case assessment is that the Reserve Bank of India (RBI) will hike rates in Q418. However, considering that we see upside risks to our inflation forecasts, the risks are also tilting towards an earlier-than-expected rate hike,” it said.
Morgan Stanley said that debate on the re-emergence of macro stability risks has intensified because of rising headline inflation, widening trade deficits and also the budget announcement last week that the fiscal deficit targets for both F2018 and F2019 will be set wider than initially targeted.
