A basis point is a hundredth of a percentage point.
Inflation is projected at 5.1% compared with an earlier estimate of 4%, while the current account deficit (CAD) is expected to widen to 2.5% of gross domestic product (GDP).
Sectors such as pharmaceuticals, paints, textiles and toys are facing margin pressures due to higher oil and gas costs being passed on by refiners. Labour-intensive industries like textiles, which have limited pricing power, are already witnessing job losses, the report noted.
It added that if oil prices surge to $150 per barrel for a quarter, GDP growth could slow further to 5.7%, inflation may exceed 6% and CAD would expand to 3% of GDP.
“Ongoing geopolitical conflict is exposing India to a terms of trade shock via higher energy prices, supply constraints and external balance pressures,” said Morgan Stanley.
It also highlighted that rising energy import costs are pushing up production expenses for businesses, fueling inflation, and exerting pressures on the Indian Rupee.India imports over 85% of its crude oil requirements, with about half of it coming from the Gulf region, passing through the Strait of Hormuz. “The combined share of oil and gas in the total commodity trade balance is 80%, and is tracking at 3.5% of GDP,” said the report.
Economic growth in the April-June quarter is expected at 5.9%, weighed down by softer industrial activity, narrowing margins, and tighter external financing. However, a gradual recovery is anticipated as supply conditions improve and government support measures take hold, the report said.
The Reserve Bank of India is likely to hold policy rates steady at 5.25%, although risks are asymmetric, said Morgan Stanley.
The initial policy response may rely on non-rate tools, such as managing oil marketing companies dollar demand, tightening outward direct investment flows and encouraging NRI deposits. However, it warned that interest rate hikes could follow if these measures fail to stabilise the rupee amid persistently high oil prices.