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High oil prices a challenge for India's economy though macros sound: Morgan Stanley

 India’s economy is facing headwinds due to high oil prices and depreciating rupee, financial services firm Morgan Stanley said in a report released on Tuesday(25 Sep ’18), but added the country’s economic condition was not difficult to handle.

“Real rates are positive, the current account deficit (CAD) is range-bound, the fiscal deficit is controlled and inflation is benign. No doubt there are pressures from rising oil prices and a depreciating currency but given the macro balance sheet, these are not difficult to handle,” said the report titled ‘India Economics and Strategy: This is not 2013’. 

It said that if we exclude oil, then the current account balance remained in surplus. So, the deterioration in terms of trade was being reflected in a wider overall CAD.

“There is pressure from rising oil prices but recent depreciation versus US dollar has brought the rupee to fair value -- from overvalued territory,” the report added. 

Morgan Stanley said that a fall in oil prices could act as a catalyst to come out of the ongoing crisis, among other measures. 

The report said that inter-bank liquidity has been close to neutral with some seasonal tax-related issues currently and expected the Reserve Bank of India to intervene in case of any tightness. 

Government borrowing in first half of FY 2018-2019, it said, had been lower than the historical average and a likely tempered second half of FY 2018-2019 borrowing programme would check 10-year yield from rising significantly from current levels. 

According to the report the growth remained strong. It said, “The upcoming earnings season could show further acceleration in revenue and earnings growth. The currency depreciation will add to the mix.” 

Forex reserves were tracking at $ 400.5 billion, which indicated that the ability to counter external shocks was significantly better than in 2013, it said. 

Regarding rates, the report said that the spreads rose to the top end of the range. Thus, profits for non-banking finance companies could be under strain in the coming quarters. 

The report said that mutual funds had stepped up their buying in September, either because retail flows improved or because funds were drawing down cash. 

“Indeed, the slowdown in non-systematic flows is not unique to recent months,” it added. 

Mentioning about the fixed income flows, the report said, “Liquid funds have seen a big surge in flows in recent weeks, which we think is money that is waiting to be deployed into either duration or equities. Either way, this is bullish for stocks. Indeed, the redemption in duration has been happening since first quarter of 2018.” 

Market timing indicator was at the low end of its five-year range, which could be a buying opportunity in stocks. “Our breadth indicator has not yet reached strong buy territory – but it is getting there,” it said.

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