Consumer inflation in the US in October coming in at a 6.2 percent jolted all markets. While equities and bonds have recovered after a one-day fall, the dollar index has climbed over 95, and the Fed fund futures are indicating at least 2 hikes next year. Morgan Stanley wrote a note explaining that items like used cars in the US may continue to push inflation up in November and spillover to December too. Also, items like higher rents tend to persist, so the current inflation may not be all that transitory. Morgan Stanley, Asia Economist, Chetan Ahya, decoded the impact of likely higher inflation and global rates on Asia and India.
He is constructive on India's growth outlook.
“We think that for the next three years, India will deliver an average growth of about 7 percent which would be, sort of effectively, the highest among all major countries in the world,” he said.
He believes the financial market volatility will not be big enough to break the India growth story. The India growth story is very different this time compared to what it has been in the last 10 years.
“This is a dynamic that we are seeing in India, which was last seen in the 2003 to 2007 cycle, macro stability indicators are fine. We have structural reforms being taken up by the government and you have external dynamics, especially exports of goods and services, which are also pretty robust, something that we had not seen in the last 10 years,” he stated.
“We are seeing an upward pressure on inflation on headline because of higher oil prices,” he mentioned.
According to him, COVID-related restrictions in countries like China and other places, have meant that consumption growth specifically has not been that strong. So, Asia doesn’t have that much of demand-side inflation pressure as yet.
“But going forward in 2022, as we see output gaps closing, we do expect core inflation to pick up. But it still will be more or less in line with the central banks' comfort zone and we don't see big inflation pressures in Asia,” he said.
He believes a lot of the commodity prices year-on-year (YoY) will come down next year. “That's the reason why we are not yet thinking about changing our forecast for inflation,” he said.
He expects growth in the Asia region to be strong in the next calendar year.
“US inflation is much higher than what has been in Asia, which is usually not the case. That gives one level of protection to Asia. The second is that the current account balances are also in a very different shape. Even a country like India, which typically runs current account deficit, has been running very low current account deficit now. But if you take the trailing four quarters, it's actually a small surplus. So, I think both those macro parameters are very different. At the same time, we are expecting growth in the region to be strong in the next calendar year. And that's what is also going to make investors attracted to the region. So, we are not as yet much concerned about financial capital inflows into the region,” he explained.
For the full interview, watch the accompanying video.