India regaining momentum, best-placed in Asia, says Chetan Ahya of Morgan Stanley

Morgan Stanley's Chief Asia Economist Chetan Ahya in his latest mid-year outlook note said he continues to see India as best-placed economy in Asia, given the supportive policy easing and its low ratio of exported goods to GDP. India’s economy is regaining momentum, supported by an improvement in government spending and strength in services exports, Ahya said. 

"In India, we believe above-normal rainfall should keep food inflation on a lower trajectory, which alongside lower oil prices would ensure headline inflation remains below the 4 per cent mid-point range of RBI’s target range," Ahya said. 

Ahya said he is still more constructive on economies less exposed to trade with domestic demand tailwinds like India, Australia and Japan. China and other trade oriented economies will face greater downward pressure on growth, he said.

Ahya said talks and potential trade deals have provided a reprieve, but not relief, from tariffs. 

"The US and China will want a comprehensive deal. That is a complex endeavour and will take time while deals with other Asian economies may not provide full tariff relief. Sectoral tariffs may still be implemented," he said. 

As tariff uncertainty lingers, it will keep weighing on growth, especially capex, he said in the note titled 'Asia Economics Mid-Year Outlook: Tariff Uncertainty: Reprieve Not Relief'.

"Weaker dollar eases financial conditions and accelerates monetary easing in Asia, but not enough to offset the drag to growth," he said.

Morgan Stanley said the weaker dollar environment has taken hold and its strategists expect this to be sustained as growth differentials will improve in favour of Asia – a reversal of recent trends. 

"This eases financial conditions and will allow central banks to take up more easing, providing an offset that was largely absent in 2018-19 when the USD was appreciating. Still expect a step down in growth: We expect Asia’s GDP growth to slow by 90pp over 4Q24 to 4Q25, vs 120bps earlier," Morgan Stanley said.

Ahya said the slowdown will be at a pace similar to 2018-19. 

"With the tariff drag on growth, benign inflation and stronger currencies, we expect central banks in the region to take up concerted monetary easing. Our forecasts are more dovish than the market is pricing," Ahya said.