'India's economic growth will stagnate with rising inflation'
India will continue to face 'stagflation-type' situation for a few more months, Morgan Stanley Research said in a report. Stagflation is a situation when economic growth of a country stagnates while inflation is rising.
India will continue to face "stagflation-type" situation for a few more months, Morgan Stanley Research said in a report.
"We believe that India will continue to face stagflation-type environment for a few more months, the government's loose fiscal policy and persistent strong rise in real rural wage growth without a commensurate increase in productivity growth is at the heart of the current stagflation-type environment," the report said.
Stagflation is a situation when economic growth of a country stagnates while inflation is rising. Considering inflation would persist above the Reserve Bank's comfort zone for longer, it said, "We are reducing our expectation of further monetary policy easing to 50 basis points (0.5 percent) by December, 2012 from our earlier expectation of 75 bps (0.75 percent)".
In its quarterly monetary policy review, RBI lowered the economic growth projection for the current fiscal to 6.5 percent from its earlier estimate of 7.3 percent, stating rising government expenditure poses risks to economic stability.
Its inflation forecast for the fiscal ending March, 2013 has also been raised to 7 percent from earlier projection of 6.5 percent. "We believe that monetary policy has a limited role in this stagflation-type environment. Moreover, the inflation outlook remains challenging. Indeed, given the poor progress of the monsoon, we believe that food and overall inflation will likely accelerate in the coming months," it said.
It added that the upside risks to food inflation could affect monetary policy decisions and there is limited room for further reduction in policy rates. "We expect RBI to keep policy rates unchanged in its next monetary policy review on September 17," it said.
As a liquidity inducing-measure, RBI reduced the Statutory Liquidity Ratio-the amount of deposits banks park in government bonds- by 1 percent to 23 percent, effective August 11.
Find latest and upcoming tech gadgets online on Tech2 Gadgets. Get technology news, gadgets reviews & ratings. Popular gadgets including laptop, tablet and mobile specifications, features, prices, comparison.
Morgan Stanley also underpins the fact that the company's earnings are positively correlated with depreciation of the Indian rupee
The current economic scenario provides little room to the Reserve Bank for lowering policy rates, said a report by Morgan Stanley.