InvestorQ : Do you agree with the Morgan Stanley view that India inflation should now taper?
diksha shah made post

Do you agree with the Morgan Stanley view that India inflation should now taper?

Riya Dwivedi answered.
1 month ago

In a recent report issued, Morgan Stanley has expressed the view that inflation risk in India may be overstated. Morgan Stanley says this, not only about India, but about all the Asian emerging markets. It is of the view that the problem of inflation may have been overstated in the Indian context and in the next few months, a number of factors should come in handy to help taper and sober inflation from their high levels. Here is why it could happen.

Firstly, there is a sharp fall in the prices of commodities. Consider these. Brent Crude has fallen from $140/bbl to around $105/bbl just in the last 2 months. However, the markets are still pencilling in high oil prices. The case is almost similar with other industrial metals like aluminium, copper, zinc and silver. Here also prices have fallen on demand concerns but that is not reflected in the inflation numbers. If you factor commodity prices into your calculation, then inflation is surely headed lower from the current levels.

It is not just the commodity prices but even the food prices have also softened in the last few days. In India, food basket has a weigh of over 60% in the CPI calculation. A solid Kharif and the lag effect of a strong Rabi crop are likely to positively weigh on food prices. In addition, edible oil prices have been brought down by lower duties or government intervention. These are not yet captured in monthly inflation and will reflect only with a gap of 2-3 months. Even food inflation appears to be headed lower in coming months.

Above all, the real problem is that demand is contracting and that is happening sharply. This is just about starting and largely it is a function of recession expectations. Recession fears may be low in India, but it is quite high in the US and EU. When people expect recession, they do expect loss of jobs, reduction in income and tighter household budgets. This compels the consumers to be more conservative than required. That is when they start preparing well in advance, and the weak demand pulls down the prices.