InvestorQ : Why does Morgan Stanley expect inflation risk to be lower in India?
swati Bakhda made post

Why does Morgan Stanley expect inflation risk to be lower in India?

Sam Eswaran answered.
1 month ago

A research note put out by Morgan Stanley has hinted that inflation risk may have peaked out in India and other Asian emerging markets. In fact, Morgan Stanley expects inflation to now surprise on the downside rather than the upside. That is why they fell the markets are overpricing inflation risk in India and Asian EMs. According to Morgan, recession fears had caused a sharp deflation in demand. Also, supply chain constraints are easing rapidly as evidenced with auto companies getting microchips easier now.

However, Morgan has also send a word of caution that services inflation could stay firm as economies reap the benefits from reopening. Unlike the good inflation, the services inflation is linked to manpower costs, which tend to be stickier compared to commodity costs. For countries like India, the real problem was higher prices of food, crude oil and industrial metals. These have tapered with Brent falling 30% and industrial metals also seeing a similar slump. India may actually score higher on inflation risk.

One more reason for this optimism is that RBI has been proactive in tackling inflation by hiking repo rates rapidly by 90 bps in 2 months. So, inflation may still take time to moderate, but inflation estimates are likely to be less aggressive going ahead. Morgan has also praised the Asian economies for managing food demand-supply dynamics much better than developed countries. After all, global prices of food grains have fallen 30% already. As a word of caution, Morgan Stanley feels that CAD could be a bigger problem than inflation.