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Healthy household balance sheets will boost sales of cars and consumer goods: Morgan Stanley

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  • The pandemic was an exogenous shock, and as it is now fading, a Morgan Stanley report says.
  • It says household balance sheets in India are healthy and a favorable macroeconomic backdrop will keep consumer confidence high.
  • It shows how India is best positioned among its Asian counterparts to supply the alpha of domestic demand.

Household balance sheets in India are healthy and a favorable macroeconomic backdrop will keep consumer confidence high, according to a Morgan Stanley report.

“The pandemic was an exogenous shock and now that it is fading, households and businesses are well positioned to spend money again. We believe that the ongoing cyclical slowdown in 2013-2019 has led to subdued demand, especially for housing, consumer durables such as cars and capital goods,” the report said.

Morgan Stanley is optimistic that Indian consumption will pick up in the coming quarters as the economy has now fully reopened and is supported by job creation and income growth.

“Particularly in the case of consumer durables, we expect the trend growth rate to continue at a higher level, as household balance sheets are healthy and a favorable macro background will keep consumer confidence high,” the report said.

‘RBI does not have to lift rates deep into restrictive territory’

This confidence comes from the cooling of crude oil and commodity prices, which have fallen 23-37% from their historic highs in March 2022.

This, Morgan Stanley predicts, will help India’s macro factors, such as inflation and forex reserves, return to comfort zone and India’s central bank may not need to step in and push for another rate hike.

“Against this backdrop, we expect that RBI will not need to lift rates deep into restrictive territory. In other words, RBI will not need to meaningfully slow domestic demand growth to contain macro stability indicators,” the report said.

Since May 2022, RBI has increased its repo rate cumulatively by 140 basis points in rapid succession, bringing the key rate now up to 5.4%, slightly above pre-pandemic levels.

However, Morgan Stanley analysts believe that more is on the way.

“Our forecast is that the RBI will raise interest rates to 6.5%, which, combined with our inflation forecasts, would mean that real interest rates will turn positive in 4Q22 and rise to 100bps in 2H23, which we believe would help drive a ​address some of the concerns about macro stability. risk,” the report said.

A sunny macro perspective, better than Asian countries

As external risks diminish, India’s gross domestic product (GDP) growth will average 7% in the coming months.

“In 2022-23, India will grow at an average of 7%, the strongest of the largest economies, contributing 28% and 22% to growth in Asia and the world,” the report said.

According to the report, India is best placed to generate the alpha of domestic demand and the cyclical recovery will be supported by structural factors.

The country’s car sales are 24% above pre-Covid levels, which is the strongest in Asia. Two-wheelers are also running strongly at 25% above pre-Covid levels. Even new real estate sales and launches have peaked in 11 and 8 years, respectively.

“The strength of the recovery provides a reassuring backdrop and represents the economy’s strongest performance in nearly a decade. In addition, it’s the breadth of the recovery where we see growth shooting off almost all cylinders, which is very encouraging,” the report said.

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