Morgan Stanley raises India's FY10 growth forecast

The economy may grow at 6.7% in 2009-10, Morgan Stanley said in a report, raising its estimate from 6.4% after data showed the economy grew at its fastest rate in 18 months in the September quarter.

Asia's third-largest economy grew 7.9% in the past quarter from a year earlier, far above forecasts of 6.3% and fastest in any quarter since June 2008.

"We believe better traction to fiscal as well as monetary policy measures and revival in capital inflows appears to be pushing domestic demand," economists Chetan Ahya and Tanvee Gupta wrote in a note dated November 30.

Morgan Stanley revised its industrial production to average 8.8% year-on-year in 2009-10 from its earlier estimate of 8% and services growth to rise to 8.6% from 8.4%, due to higher growth in trade, hotels, transport and communications.

Morgan Stanley said poor agriculture growth due to weak monsoons has been pushed to the quarter-ended December 2009 and it expects agriculture output to decline by 2.4% in 200910 from its earlier estimate of -2.7%.

Ahya and Gupta have retained their inflation estimate of 6.5% by end-March 2010 and expect the central bank to lift policy rates by 25 basis points in January 2010.

"This potential rate hike is unlikely to derail the recovery as we view this expected increase in rates as a move toward normalization rather than as a tightening that will hurt growth," the note said.