Brexit impact: India's growth may dip by 60 bps, says Morgan Stanley

Morgan Stanley said it expects the monetary policy to be more focused on mitigating liquidity tightness through open market operations.

With the UK's referendum to leave the European Union, the impact on Indian economy would be through trade and financial channels. Photo: Reuters

Brexit is likely to have an adverse impact on India's growth with domestic GDP expected to decline by up to 60 basis points in a high-stress scenario within the next two years, Morgan Stanley on Tuesday said in a report.

According to the global financial services major, with the UK's referendum to leave the European Union, the impact on Indian economy would be through trade and financial channels.

However, it noted that owing to lower direct exposure in terms of exports to the UK, the Brexit impact would be "less" as compared to other more open economies in the region.

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"In a medium-stress scenario, we expect downside of 10-20 bp to GDP growth in the next two years, while in a high-stress scenario, we expect downside of 30-60bp to GDP growth," Morgan Stanley said.

In terms of policy response to the situation, Morgan Stanley said it expects the monetary policy to be more focused on mitigating liquidity tightness through open market operations (purchase of government securities) in the eventuality of capital outflows.

"Given that overall fiscal policy stance remains slightly expansionary, we do not expect any major change in fiscal policy by the government," it added.

On the upside, the report noted that several indicators have pointed towards broadening of the country's economic recovery on account of pickup in discretionary consumption following the improvement in public capital expenditure and foreign direct investment flows, which remain strong.

"The pick-up in consumption is of particular significance given that discretionary consumption has been on a weak trend since mid-2012," the report said.

"Retail loan growth, petrol consumption, air passengers flown and consumer durables production have shown an improving trend over the last four months, indicating a pick-up in discretionary consumption," it added.

Moreover, there has been a pick up in two-wheeler sales as well as improvement in steel and cement demand reflecting a rise in infrastructure related activity, among others.

On private capex, the report said there would be an initial period wherein capacity utilisation levels would rise as consumption demand picks up as well as an improvement in corporate profitability.

"This will create the base for private corporate capex to kick in, which we think will take 12-18 months to recover on a full-fledged," it added.

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