Modest rise in indices likely in the next 12 months: Morgan Stanley

Our Bureau Mumbai | Updated on January 12, 2018 Published on June 07, 2017

Sees large-caps outperforming mid-caps in the rest of the year

In its mid-year India Economic Outlook, Morgan Stanley has said it believes that roadblocks to growth are dissipating and meaningful increase in growth will be witnessed from the second quarter of the current fiscal. It said the economy will enter a full-fledged recovery by the first quarter of next year.

The company has said the key domestic risks in the near term include the possibility of the impact of demonetisation to linger longer and a possible drag on growth on account of the introduction of GST.

Ridham Desai, MD, Morgan Stanley India, said, “The market also has to deal with GST transitions which means that there will be some supply chain disruptions. Implementation of GST will cause a reduction in system inventory. So, actually assets will become more productive. So, GST is a big boost for return on capital.”

Large-caps more attractive

Issues such as the resolution of NPAs held by banks, capital adequacy of State-owned banks and fiscal consolidation progress would influence the growth trajectory beyond the near term.

Commenting on the recent rally that has been witnessed in the stock market, Desai said, “Over the next twelve months, we expect the index going up more modestly than it has over the past five to six months. Large-caps look more attractive than mid-caps. In the rest of this year, we could see large-caps outperforming mid-caps.”

The report also said while the drivers of growth over the next two to three quarters will be consumption, public capex and exports, a subsequent increase in private capital expenditure is expected on account of increased capacity utilisation due to simultaneous improvement in domestic and external demand, coupled with improvements in corporate balance sheets.

“We are going to see a pick-up in core inflation which has been lagging so far. Nominal dollar GDP growth will also go to a five-year high,” said Chetan Ahya, an Economist at Morgan Stanley.

Rate hike

The report predicts that headline CPI inflation would trough in the June quarter but its near-term trajectory is still uncertain. It also predicts that GST will have minimal direct impact on CPI inflation.

The report also said that once core inflation picks up, the RBI would eventually look at a rate hike in the second half of calendar year 2018.

The fiscal deficit is expected to narrow to 5.8 per cent in FY18, while the current account deficit is seen widening to 1.2 per cent in 2017.

Published on June 07, 2017
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