Despite some investors' doubts about India's growth prospects, recent signs indicate that the Indian economy is showing signs of cyclical recovery.
The analyst team led by Chetan Ahya, Chief Asia Economist at Morgan Stanley, recently released a report stating that although international trade tensions may continue to weigh on growth prospects in Asia, India is expected to perform well in the region due to its low proportion of goods exports to GDP, strong service exports, and supportive domestic demand policies.
The Ahya team pointed out that the key driver is the clear policy shift—from unnecessary fiscal and monetary tightening to a more proactive supportive stance. Monetary policy is focusing on interest rates, liquidity injection, and regulatory easing, while fiscal policy supports domestic demand through sustained capital expenditure and tax cuts.
<h2>Monetary Policy &#34;Triple Approach&#34; Easing</h2>
The Morgan Stanley report noted that the Reserve Bank of India's monetary easing policy is making strides in three areas:
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Interest Rates: The real policy interest rate based on core inflation has fallen from a peak of 3.4% in June 2024 to 2.5% in February 2025. With food inflation easing, this provides room for the Reserve Bank of India to cut rates. The report predicts that the central bank will cut rates by 25 basis points in April and June, totaling a 75 basis point cut (since the first rate cut in December 2024).
Liquidity: The central bank is injecting liquidity through open market operations, floating rate repos, and dollar/Indian rupee swap transactions. The weighted average interbank lending rate (based on a 14-day average benchmark) has decreased by 43 basis points from the end of December's peak and continues to remain below the repo rate. The interbank liquidity deficit is narrowing (with a daily average deficit of $15.8 billion in March, down from $18.9 billion in February).
Regulatory Easing: The central bank has begun to ease the tightening of regulations on non-banking financial companies (NBFCs), such as reducing the risk weight on bank loans to NBFCs by 25 percentage points, which helps improve liquidity accessibility. Further easing of regulatory requirements on consumer credit is expected next.
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<h2>Fiscal Policy Maintains Supportive Stance</h2>
The report indicates that the recovery of private capital expenditure will be slow, thus the recovery of government capital expenditure is a key support point. Morgan Stanley expects that government capital expenditure shows sustained recovery momentum:
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Government Capital Expenditure Recovery: In January, government capital expenditure accelerated to a year-on-year growth of 67% based on a 3-month moving average. Morgan Stanley expects that central government capital expenditure will grow by 10.1% year-on-year in the fiscal year 2026, with total capital expenditure, including grants to state governments, expected to grow by 17.4%.
High Deficit Rate Maintained: The government has set the central government fiscal deficit target for the fiscal year 2025 (F2025) at 4.8% of GDP and expects it to slow to 4.4% of GDP in the fiscal year 2026 (F2026), indicating continued support for economic growth while undertaking fiscal consolidation
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<h2>High-frequency data shows marginal economic improvement</h2>
At the same time, the team of Upasana Chachra, Chief India Economist at Morgan Stanley, released a latest report indicating that India's high-frequency economic data presents a mixed but overall positive trend, suggesting that cyclical growth recovery is underway.
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Goods and Services Tax (GST) revenue averaged a growth acceleration to 10.7% during January to February 2025 (close to 12.6% after leap year adjustment), significantly higher than 8.3% in the fourth quarter of 2024.
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Manufacturing and Services Purchasing Managers' Index (PMI) continues to remain in the expansion zone above 50.
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Morgan Stanley pointed out that the economic recovery in rural areas is gradually solidifying, with fast-moving consumer goods (FMCG) sales growth outpacing urban areas. Initial signs of employment growth are emerging, and wage growth is expected to lag behind recovery. Private consumption growth is expected to remain resilient, with consumer confidence still high.
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In terms of foreign trade, service exports are growing strongly and are expected to continue supporting economic growth and employment prospects. The balance of goods and services trade as a proportion of GDP is expected to remain stable, with the current account deficit (CAD) expected to fluctuate around 1% of GDP.
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<h2>Market sentiment warms up, funds return to India</h2>
As the market bets on economic recovery, the Indian stock market has also started to rise. In March, the benchmark index Nifty 50 achieved its first monthly increase in the past six months, rebounding 6.3% from its low as of March 28.
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Meanwhile, after experiencing over $15 billion in capital outflows since January, foreign capital is accelerating its return. Data compiled by Bloomberg shows that in the week ending March 27, global funds net purchased $2.6 billion in Indian stocks, marking the second consecutive week of net buying and the largest inflow since early December
JP Morgan's Head of Private Banking Asia Investment Strategy, Alexander Wolf, wrote in the report:
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&#34;Given that domestic factors are constructive and the vulnerability to external trade tensions is decreasing, we believe that India's economic momentum is about to bottom out and rebound, which could boost the stock market.&#34;
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It is worth noting that in the week ending March 21, foreign investors net purchased USD 515 million of Indian stocks, marking the first net purchase since December of last year, signaling positive momentum.
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Recently, although some investors still have doubts about the growth prospects of the Indian economy, the Morgan Stanley analyst team pointed out that the Indian economy is showing signs of cyclical recovery. Due to the low proportion of goods exports to GDP, strong service exports, and supportive domestic demand policies, India is expected to perform outstandingly in the Asia region. The report emphasizes that the policy has shifted to a supportive stance, with monetary policy stimulating the economy through interest rate cuts, liquidity injections, and regulatory easing, while fiscal policy supports domestic demand through sustained capital expenditure and tax reduction measures

- Recent signs indicate a cyclical recovery in India's economy, despite some investor skepticism.  
- Morgan Stanley's report highlights India's resilience due to low export dependence on goods, strong service exports, and supportive domestic policies, with a shift towards more aggressive monetary and fiscal support.  
- High-frequency economic data shows mixed but overall positive trends, with increasing GST revenues and a rebound in the stock market, suggesting a potential bottoming out of economic momentum.

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